a  "5  «T 


THE    THEORY    OF    PROSPERITY 


The  Theory  of  Prosperity 


BY 


SIMON   N.    PATTEN,    PH.D. 

PROFESSOR  OF  POLITICAL  ECONOMY,   WHARTON  SCHOOL  OF  FINANCE 

AND  ECONOMY,   UNIVERSITY  OF  PENNSYLVANIA 
AUTHOR   OF   "THE  DEVELOPMENT  OF  ENGLISH  THOUGHT,"    ETC. 


If  orfc 
THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  LTD. 
1902 

All  rigbtt  reserved 


COPYRIGHT,  1903, 
BY  THE  MACMILLAN  COMPANY. 


Notfaooli 

J.  8.  Cu»hin«  &  Co.  —  Berwick  &  Smith 
Norwno     Mais.  U.S.A. 


FRANKLIN   HENRY   GIDDINGS 

WHOSE   GENIAL   COOPERATION   AND   FRIENDLY   CRITICISM 

HAVE   BEEN   TO   ME   OF   EQUAL   VALUE  AS 

A  STIMULUS  TO  THOUGHT 


CONTENTS 

PACK 

INTRODUCTION i 

PART   I 

INCOME  AS  DETERMINED  BY  EXISTING    CONDITIONS 
CHAPTER  I 

WORK  AND  PAY 

1.  Utility,  Cost,  and  Value 13 

2.  The  Social  Surplus 19 

3.  The  Origin  of  Value 21 

4.  Cost  and  Expense           .........  25 

5.  The  Normal  Working  Day    ........  29 

6.  False  Measurements  of  Costs          .......  35 

7.  The  Conservation  of  the  Social  Surplus          .....  41 

8.  The  Wages  of  Mobile  Labor 45 

CHAPTER   II 

MONOPOLY  ADVANTAGE 

1.  Market  Prices 51 

2.  The  Limits  to  Price  Movements 58 

3.  The  Elements  of  Market  Price 64 

4.  Speculation  ...........  66 

5.  Competition  through  Monopoly    .......  71 

6.  Differential  Advantage  .........  74 

7.  Price-determining  Units  of  Supply 80 

8.  The  Monopoly  Fund     .........  82 

9.  The  Burden  of  Monopoly £S 


viii  Contents 

CHAPTER  III 

INVESTMENTS 

PAGE 

1.  Surplus  Value 95 

2.  The  Cause  of  Interest 99 

3.  Funded  Income     ..........  109 

4.  Unearned  Income          .         .         .         .         .         .         .         .         .116 

5.  The  Static  Equilibrium 126 

6.  Income  as  equalized  by  Natural  Law    ......  134 

A  Summary        ...........  140 


PART   II 

INCOME  AS  DETERMINED  BY  HEREDITY 

CHAPTER   I 
INCOME  AS  FIXED  BY  STRUGGLE 

1.  Economic  Freedom 151 

2.  Exploitation 155 

3.  Adhesive  Adjustment     .........  163 

4.  Cohesive  Morality 1 66 

5.  The  Decline  of  Exploitation 170 

6.  Social  Integration          .         .         .         .         .         ,         .         .         .175 

CHAPTER   II 

INCOME  AS  INCREASED  BY  ADJUSTMENT 

1.  Mental  Adaptation 180 

2.  Impulse 185 

3.  Idealism 192 

4.  Selection       ...........  194 

5.  Social  Reasoning 200 


Contents  ix 

CHAPTER   III 
INCOME  AS  MODIFIED  BY  ECONOMIC  RIGHTS 

PAGE 

The  Source  of  Rights 210 

1.  Public  or  Market  Rights 216 

The  Right  to  an  Open  Market.  The  Right  to  Publicity.  The 
Right  to  Security.  The  Right  to  Cooperate. 

2.  Social  Rights 219 

The  Right  to  a  Home.  The  Right  to  Develop.  The  Right  to 
Wholesome  Standards.  The  Right  to  Homogeneity  of  Popu- 
lation. The  Right  to  Decision  by  Public  Opinion. 

3.  Rights  of  Leisure 224 

The  Right  to  Comfort.  The  Right  to  Leisure.  The  Right  to 
Recreation.  The  Right  to  Cleanliness.  The  Right  to  Scenery. 

4.  Exceptional  Rights 227 

The  Right  to  Relief.    The  Right  of  Women  to  Income. 

A  Summary 230 

A  Final  Restatement 234 


THE   THEORY    OF   PROSPERITY 


INTRODUCTION 

THE  industrial  changes  of  the  past  century  have 
not  advanced  wages  nor  relieved  misery  to  the  degree 
that  economists  hoped.  Even  the  most  conservative 
thinker  one  hundred  years  ago,  could  he  have  foreseen 
the  inventions,  economies,  and  transformations  that 
have  taken  place  since  his  day,  would  have  predicted 
a  greater  advance  than  has  come.  It  is  no  wonder  that 
many  reformers  lay  the  blame  for  this  lack  of  progress 
on  economic  laws  and  try  to  devise  schemes  by  which 
they  may  be  circumvented.  The  equality  that  has  not 
been  brought  by  economic  forces  is  sought  in  a  com- 
plete social  reorganization  by  which  competition  is  to 
be  displaced. 

That  social  evils  are  economic  in  their  origin  is  a 
mere  assumption.  Economic  laws  are  the  outcome 
of  forces  acting  in  the  present  environment.  Evi- 
dence for  or  against  them  must  come  directly  from 
the  relations  existing  between  men  and  the  environ- 
ment in  which  they  live.  All  economic  forces  arise 
out  of  existing  conditions  and  exert  an  influence  on  the 
present  race  of  men.  An  environment  once  left  is  no 
longer  a  living  force.  Its  effects,  however,  may  influ- 
ence men,  but  it  will  be  through  heredity,  morals,  and 

B  I 


2  The  Theory  of  Prosperity 

traditions.  The  present  environment  acts  on  men 
through  its  economic  forces ;  past  environments  through 
heredity  and  its  accompanying  habits,  customs,  and  im- 
pulses. Long-standing  evils,  therefore,  showing  them- 
selves in  many  races  and  at  various  times,  are  more 
likely  to  be  the  result  of  heredity  than  of  environment. 
They  are  more  nearly  the  same  in  all  existing  races 
than  are  their  present  environing  conditions. 

Adjustment  is  thus  due  to  a  long  series  of  environ- 
ments ;  economic  laws,  to  the  one  in  which  men  now 
live.  The  conditions  of  past  environments  have  no 
effect  on  the  production  or  distribution  of  present 
wealth.  Their  social  consequences,  however,  endure, 
making  present  tendencies  the  complex  result  of  eco- 
nomic laws  and  heredity.  It  is  a  mistake  to  associate 
misery  with  production,  and  to  assume  that  it  is  due  to 
poverty.  They  are  not  the  same,  though  both  make  men 
suffer.  Poverty  is  a  lack  of  resources  the  result  of 
definite  economic  causes  ;  while  misery  is  non-adjustment 
due  to  a  lack  of  harmony  between  effort  and  result. 
The  smallness  of  the  result^  means  poverty  |  the  uncer- 
tain typ^_the_result,  or  the  failure  to  produce  the  desired 
result,  is  misery.  A  savage  puts  forth  a  great  amount 
of  effort.  He  is  miserable,  not  from  any  lack  of  re- 
sources, but  because  his  effort  is  misdirected.  A  short 
period  of  struggle  against  the  uncertainties  of  his  situa- 
tion breaks  down  his  bodily  powers,  puts  pain  where 
pleasure  should  be,  and  makes  life  a  burden,  if  it  is  not 
cut  off  by  complete  failure.  The  civilized  man  puts  out 
a  similar  effort,  and  he,  too,  is  miserable,  not  because 
the  return  is  small,  but  because  effort  and  result  do  not 
correspond.  He  sees  a  great  product  pass  through  his 


Introduction  3 

hands,  but  when  he  looks  back  on  his  life  he  pronounces 
it  a  failure;  the  great  product  has  brought  misery  in- 
stead of  happiness.  To  such  a  man  work  is  pain,  not 
pleasure,  and  the  goods  he  acquires  do  not  produce  the 
anticipated  satisfaction.  The  breach  is  not  between 
effort  and  return,  but  between  the  goods  of  which  the 
return  is  made  up  and  the  mental  states  their  use  is  sup- 
posed to  create.  Effort  produces  goods,  but  goods  do  not 
create  happiness.  Men  attain  happiness,  not  by  creat- 
ing a  great  product  of  goods,  but  by  reaching  the  goal 
for  which  they  set  out.  The  task  involves  the  whole 
complex  problem  of  adjustment,  and  not  the  simple  one 
of  production.  Poverty  has  its  causes  in  the  present 
environment,  while  the  general  failure  of  men  to  get  in 
touch  with  nature  brings  misery,  whose  causes  go  back 
hundreds  of  generations  and  affect  every  relation  into 
which  men  enter.  Some  end  other  than  goods  must 
be  reached  before  misery  is  displaced.  Efforts,  goods, 
satisfactions,  is  an  incomplete  cycle  wearing  out  the 
recipient.  Only  efforts,  goods,  satisfactions,  ends, 
make  a  complete  circle,  or  rather  a  spiral,  which  in 
each  circuit  raises  the  individual  a  little  above  his 
former  state. 

It  follows  from  this  analysis,  that  the  real  social  prob- 
lem is,  not  as  Henry  George  puts  it,  Why  in  spite  of  the 
increase  of  productive  power  does  poverty  persist ;  but, 
Why,  under  these  conditions,  does  misery  grow  until 
life  is  not  worth  living?  That  many  people  regard  life 
as  a  burden  cannot  be  doubted,  but  this  state  of  mind 
is  due  to  a  misuse  of  goods,  not  to  a  lack  of  them.  The 
gap  is  not  between  effort  and  goods,  but  between  goods 
and  enduring  satisfactions.  The  economic  and  the 


4  The  Theory  of  Prosperity 

social  problems  can  thus  be  sharply  contrasted,  and 
should  be  kept  distinct.  Problems  pertaining  to  exist- 
ing conditions  should  not  be  confused  with  problems  of 
heredity.  That  they  are  confused  is  the  outcome  of  the 
historical  evolution  of  society.  Most  nations  have  been 
formed  by  conquest,  and  therefore  start  with  a  domi- 
nant and  a  subject  class.  The  former  seize  the  surplus, 
and  force  the  latter  to  work  for  a  bare  minimum.  In 
primitive  nations  most  of  the  surplus  was  connected 
with  the  land,  so  that  land-owning  and  surplus-receiving 
were  practically  identical.  The  economists  therefore 
naturally  regarded  the  ruling  and  the  landed  class  as 
one,  and  called  its  income  rent.  Wages  thus  became 
associated  with  the  exploited  classes  whose  return  did  not 
exceed  their  costs.  Cost  and  wages  on  the  one  side,  and 
rent  and  surplus  on  the  other,  were  respectively  viewed 
as  identical,  and  were  distinct  funds  going  to  sharply 
isolated  classes.  This  early  society  was  modified  by  the 
introduction  of  capital.  Neither  of  the  first  two  classes 
possessed  prudence  and  forethought,  since  the  aristo- 
cratic landlord  lived  in  the  present,  and  exploited  its 
resources  as  fully  as  did  the  laborer.  The  qualities  of 
the  capitalist  were  therefore  in  marked  contrast  with 
those  of  the  other  classes,  and  he  derived  his  income 
from  sources  which  they  neglected.  Trade  and  industry 
gave  profits,  a  new  income  distinct  from  the  rent  of 
landlords  or  the  wages  of  workmen.  So  long  as  work- 
men lacked  the  qualities  of  capitalists  and  traders,  and 
could  not  become  aristocrats,  the  social  gulf  between 
the  classes  made  rent,  profits,  and  wages  distinct  in- 
comes, the  sum  of  which  equalled  the  total  product. 
1 1  The  shares  were  thought  of  separately,  not  because 


Introduction  5 

rent,  profits,  and  wages  are  economically  distinct,  but 
because  the  heredity  of  each  class  isolated  it  from  the 
others. 

Only  a  few  generations  ago,  according  to  received 
opinion,  there  was  a  distinct  class  for  each  kind  of 
income.  The  landlords  were  isolated  socially  and  politi- 
cally from  the  people  who  engaged  in  trade.  The  bank- 
ers and  other  investors  were  a  distinct  group  receiving 
interest  on  their  capital  without  controlling  its  invest- 
ment, while  separated  from  all  of  these  were  the  laborers 
doing  mechanical  work  and  receiving  wages.  These 
classes  are  gradually  merging.  There  is  no  distinct 
class  of  landlords ;  business  managers  and  investors 
come  socially  from  the  same  class;  and  the  laborers 
readily  pass  from  the  class  of  mere  workers  to  that  of 
capitalists  and  managers.  Social  reasons  no  longer 
exist  for  keeping  rent,  profits,  interest,  and  wages  apart 
because  they  represent  the  incomes  of  distinct  classes. 
There  are  few  persons  who  do  not  receive  income  in 
all  these  forms.  The  laborer  owns  his  house,  has  life 
insurance,  and  keeps  a  bank  account.  He  may  also  be 
foreman  in  some  establishment,  or  have  some  position  of 
trust  and  responsibility  by  which  he  shares  in  the  profits 
of  his  employer.  There  is  no  separation  of  earned  from 
unearned  income.  All  except  possibly  the  lowest  labor- 
ers have  some  of  both.  Social  distinctions  form,  there- 
fore, no  basis  upon  which  theories  of  distribution  can 
rest.  As  these  differences  between  landlord,  manager, 
capitalist,  and  laborer  pass  away,  the  terms  rent,  profits, 
interest,  and  wages  cease  to  be  clear  demarcations  of 
income,  and  must  be  newly  defined  or  entirely  dis- 
carded. 


The  Theory  of  Prosperity 


Great  confusion  has  arisen  in  economic  literature  out 
of  attempts  to  redefine  these  terms.  Rent  is  viewed 
sometimes  as  the  income  of  idle  landlords,  sometimes  as 
a  gift  of  nature  arising  from  the  cooperation  of  its  forces 
with  man,  and  again  as  a  differential  due  to  advantages 
in  production.  Capital  and  interest  have  almost  as 
many  definitions  as  there  are  writers  on  these  topics, 
while  wages  may  mean  anything  from  the  lowest  in- 
comes of  laborers  to  the  largest  salaries  paid  as  wages 
of  superintendence. 

In  these  attempts  to  restate  economic  theory,  the 
terms  rent,  profit,  interest,  and  wages  do  not  represent 
•'jrelated  shares.  While  all  assert  that  product  equals 
/rent  plus  profits  plus  interest  plus  wages,  the  part  of 
this  total  product  assigned  to  each  share  depends  upon 
\the  definition  of  these  terms.  Each  writer  tends  to 
/minimize  some  of  the  shares  and  to  expand  others,  thus 
throwing  most  of  the  income  to  one  share.  This  can  be 
done  by  defining  three  of  the  terms  narrowly,  and  one 
of  them  broadly,  leaving  it  as  the  residual  claimant :  it 
can  be  done  by  calling  some  of  these  incomes  static 
and  others  dynamic,  thus  excluding  the  latter  as  tem- 
porary ;  or  it  can  be  done  by  emphasizing  the  monopoly 
element,  or  the  advantages  of  heredity  by  which  one 
factor  grows  at  the  expense  of  the  rest.  In  any  case 
shares  are  marked  off  that  will  not  add,  the  sum  being 
different  from  the  total  product  that  is  to  be  divided. 
Putting  together  the  rent  of  Henry  George,  the  profits 
of  Walker,  the  interest  or  exploitation  fund  of  Marx, 
and  the  wages  of  Ricardo  or  Clark  does  not  give  the 
total  product  of  industry,  but  a  much  larger  fund. 

If  society  is  viewed  as  the  outgrowth  of  heredity,  men 


Introduction  7 

fall  into  certain  groups,  each  having  its  income  de- 
termined by  the  position  and  qualities  it  has  inherited. 
If,  on  the  contrary,  men  are  thought  of  as  in  direct  con- 
tact with  existing  conditions,  the  relations  between  men 
and  nature  are  the  only  forces  determining  the  size  of 
their  incomes.  In  a  strictly  stratified  society  the  share 
of  each  class  is  distinct,  and  the  sum  of  the  shares 
equals  the  total  product  of  industry.  But  if  notions  of 
heredity  are  discarded,  the  shares  are  not  isolated,  but 
go  in  a  larger  or  smaller  proportion  to  every  member  of 
the  community.  Each  person  can  now  with  some  justi- 
fication call  his  income  what  he  pleases.  Both  land- 
owner and  capitalist  can  claim  that  their  incomes  are 
due  to  work  and  energy  with  as  much  plausibility  as  the 
laborer.  Henry  George  can  make  it  appear  that  all 
improvements  augment  rent  by  so  defining  rent  that  it 
includes  all  the  social  surplus.  The  reasoning  of  Carey 
pursued  to  its  logical  conclusion  makes  all  income 
appear  to  be  interest.  Along  with  the  return  on  capi- 
tal goods  he  puts  the  income  from  land,  claiming  that 
it  results  from  the  capital  sunk  in  its  improvements. 
To  this  he  might  have  added  the  income  of  laborers  by 
assuming  that  wages  no  more  than  compensate  for  the 
cost  to  the  race  of  acquiring  the  industrial  qualities  that 
make  labor  efficient.  If  the  miseries  and  pains  of 
natural  selection  are  what  biologists  represent,  the  ad- 
vantages of  natural  ability  give  but  a  small  return  on 
the  original  expense  of  acquisition.  I  know  of  no 
economist  who  has  justified  in  this  way  the  gradual 
enlargement  of  the  total  share  of  the  capitalistic  class, 
but  many  have  gone  far  in  this  direction,  and  in  all 
cases  their  interest  fund  will  not  add  with  the  rent  and 


8  The  Theory  of  Prosperity 

wages  funds  of  writers  who  so  define  labor  that  wages 
is  the  only  legitimate  income,  or  who  look  upon  rent  as 
the  grand  absorbent  of  all  income. 

This  overlapping  of  the  conventional  funds  can  only 
be  obviated  by  a  new  classification.  What  this  should 
be  has  already  been  suggested  in  the  discussion  of 
the  difference  between  poverty  and  misery.  The  same 
thought  may  be  presented  directly  from  the  standpoint 
of  income.  In  its  simplest  aspect  income  is  either  a 
remuneration  for  costs  or  a  surplus  remaining  after 
costs  have  been  paid.  Costs  measure  the  lack  of  ad- 
justment. In  a  society  perfectly  adjusted  to  existing 
conditions  there  would  be  no  costs.  All  action  would 
be  pleasurable  and  all  income  a  surplus.  Such  a  per- 
fectly adjusted  society  would  not  have  the  distribution 
of  its  income  in  the  least  affected  by  class  distinctions, 
heredity,  or  tradition.  Adjustment  would  break  down 
class  barriers,  and  make  all  men  equal  and  equally  en- 
dowed. Income  could  accordingly  be  turned  in  any 
direction,  and  its  different  forms  blended  in  any  fashion. 
Rent,  interest,  and  wages  would  no  longer  be  isolated 
funds  going  to  separate  classes.  Any  income  may  be 
thought  of  and  properly  put  under  either  of  these  heads. 
Instead,  therefore,  of  being  three  distinct  funds,  these 
shares  are  the  bases  of  three  view  points  from  which 
income  may  be  examined.  Give  to  wages  its  broadest 
meaning,  and  both  rent  and  interest  disappear.  Do  the 
same  to  rent  and  interest  in  turn,  and  in  the  one  case 
there  is  neither  wages  nor  interest ;  in  the  other  neither 
wages  nor  rent.  The  first  view  point  gives  the  simple 
relations  of  work  and  pay ;  the  .second,  those  of  monop- 
oly advantages;  and  the  third,  those  of  investments.  The 


Introduction  9 

income  due  to  existing  conditions  should  therefore  be 
considered  under  these  three  heads,  as  in  the  following 
pages.  Taken  together,  they  present  one  aspect  of 
income  —  income  as  determined  by  existing  conditions. 
There  is  another  aspect  of  equal  importance  —  income 
as  determined  by  heredity.  The  laws  of  heredity  are 
mental  and  social ;  those  of  the  environment  are  physi- 
cal and  economic.  Race  traits,  customs,  and  traditions 
determine  the  direction  in  which  much  of  the  income 
of  society  goes,  and  their  influence  tends  to  divide  the 
income  of  society  into  as  many  funds  as  there  are 
distinct  classes.  Existing  conditions  make  for  mobile 
income,  and  would,  if  all-powerful,  divide  it  according 
to  some  one  law.  The  two  aspects  will  not  blend  into 
any  simple  scheme,  nor  will  the  same  remedies  cure  the 
evils  they  respectively  reveal.  The  evils  of  heredity 
and  tradition  are  overcome  by  modifying  men ;  those  of 
nature  by  an  increase  of  energy  and  productive  power. 
Isolation  of  these  problems  is  therefore  indispensable 
to  clear  analysis. 


PART    I 

INCOME  AS  DETERMINED  BY  EXISTING 
CONDITIONS 

A  STUDY  OF  EFFORT  AND  SATISFACTIONS 


CHAPTER   I 
WORK  AND  PAY 

THE  life  of  men  is  made  economic  by  their  need  of  utility, 
goods  suitable  for  consumption.  Anything  that  satisfies 
a  desire  is  a  utility.  Wants  have  different  degrees  of 
intensity,  and  in  supplying  them  additional  quantities 
of  a  commodity  give  decreasing  pleasure.  Each  con- 
sumer has  a  scale  of  wants  and  strives  so  to  arrange  his 
goods  in  consumption  that  the  most  intense  of  these 
are  satisfied.  When  experience  proves  that  a  given 
expenditure  gives  less  pleasure  than  would  a  greater 
expenditure  in  some  other  direction,  less  of  the  first 
article  and  more  of  the  second  is  bought.  There  is 
thus  for  each  person  a  degree  of  satiety  which  he  tries 
to  secure  for  all  the  articles  he  uses.  He  so  arranges 
his  total  consumption  that  the  final  increment  of  each 
article  gives  him  the  same  pleasure.  Every  one  has 
a  margin  of  consumption  which  marks  the  limit  be- 
tween his  satisfied  and  unsatisfied  wants.  This  margin 
rises  when  his  income  decreases  so  as  to  compel  him 
to  supply  his  wants  less  fully.  It  falls  when  an  increase 
of  income  permits  a  nearer  approach  to  satiety. 

All  economic  relations  would  be  based  upon  these 
simple  relations  if  the  goods  created  by  nature  were 
not  limited.  Men,  however,  can  increase  the  quantity 
of  these  durable  goods,  and  the  energy  used  in  their 
production  is  work.  This  expenditure  of  energy  is 

13 


14  The  Theory  of  Prosperity 

normally  agreeable,  but  in  a  decreasing  degree  with 
each  repetition  of  a  given  act.  When  work  is  con- 
tinued, the  surplus  energy  is  exhausted  and  at  this 
point  work  becomes  pain,  which,  endured  for  the  pro- 
duction of  goods,  is  cost.  It  must  not,  however,  be 
assumed  that  every  commodity  has  a  cost  and  that  from 
every  utility  something  must  be  deducted  for  the  neces- 
sary costs.  Pains  begin  only  when  surplus  energy  is 
gone,  and  this  point  may  not  be  reached  until  the 
period  of  production  is  nearly  completed.  When  his 
surplus  energy  is  exhausted,  the  laborer  should  cease 
work  and  consume  what  he  has  produced.  His  goods 
would  be  transformed  by  consumption  into  surplus 
energy,  and  then  he  would  be  ready  for  a  new  period 
of  enjoyable  production.  A  perpetual  round  of  pro- 
duction, consumption,  rest,  revival  of  energy,  and  re- 
newed production  in  which  no  pain  enters  is  thus 
possible. 

Economists  often  overlook  the  connection  between 
the  consumption  of  goods  and  the  creation  of  surplus 
energy.  They  think  of  consuming  for  mere  pleasure, 
and  then  of  work  as  a  disagreeable  isolated  act.  This 
concept  has  been  created  by  the  division  of  society 
into  two  classes,  the  one  of  which  consumes  without 
producing  much,  and  the  other  produces  without  much 
consumption.  So  long  as  some  men  can  consume  with- 
out working,  and  others  must  work  hard  without  an 
adequate  consumption,  it  is  easy  to  think  of  production 
and  consumption  as  separate  and  distinct  processes ; 
but  both  these  classes  represent  abnormal  conditions. 
The  normal  man  seeks  to  establish  a  direct  relation 
between  his  consumption  and  production,  and  forms 


Work  and  Pay  15 

of  consumption  that  do  not  result  in  the  creation  of 
surplus  energy  are  dissipation  and  hinder  him  in  his 
struggle  for  existence  and  superiority.  The  dissipated 
are  thus  steadily  eliminated,  leaving  those  whose  use 
of  goods  tends  to  create  the  surplus  energy.  Every 
increase  of  productive  power  adds  to  the  quantity  of 
goods  consumed,  and  these  if  properly  used  augment 
the  surplus  energy  of  workers.  They  begin  the  day 
with  more  energy  and  can  work  longer  before  feeling 
pain.  Free  workmen  in  advanced  societies  should  not 
be  under  the  necessity  of  producing  so  long  that  costs 
appear.  Certainly  surplus  energy  can  so  increase  that 
human  wants  can  be  supplied  without  any  costs  of  pro- 
duction. But  even  if  this  is  not  so,  we  should  bear  in 
mind  that  production  is  due  to  energy  and  not  to  costs. 
Utility  and  cost  are  not  opposites  nor  even  necessarily 
related.  Energy  produces  utility,  and  utility  produces 
energy;  otherwise  the  worker  is  stupid,  diseased,  or 
dissipated.  The  expenditure  of  energy  becomes  cost 
only  under  abnormal  conditions  which  progress  should 
make  increasingly  rare.  Costs  are  merely  an  incident 
of  production,  and  do  not  determine  any  of  its  funda- 
mental relations. 

When  men  realize  that  their  command  over  nature's 
products  is  too  limited  to  satisfy  their  wants,  the  phe- 
nomenon of  value  appears.  A  cup  of  water  has  no  Value, 
value  if  it  can  be  replaced  from  a  running  brook,  but 
if  water  is  scarce,  each  cupful  has  a  value  because  its 
loss  leaves  some  want  unsatisfied.  The  value  of  each 
unit  of  a  commodity  is  determined  by  the  loss  of  pleas- 
ure that  the  consumer  would  undergo  if  deprived  of  it. 
Each  unit  being  like  every  other  unit,  they  all  have 


1 6  The  Theory  of  Prosperity 

the  same  value  because  the  loss  of  any  one  of  them 
\  would  be  equally  felt  by  the  consumer.     This  final  unit 
of  each  commodity  is  called  the  marginal  unit,  and  its 
\  value  fixes  the  value  of  every  other  unit  of  goods  capa- 
ble of  supplying  the  same  want. 

//  The  marginal  units  of  different  goods  must  also  have 
j'j  the  same  value.  If  the  marginal  unit  of  bread  gave 
less  pleasure  than  the  marginal  unit  of  meat,  the  con- 
sumer would  dispose  of  a  part  of  his  bread  and  buy 
more  meat.  The  pleasures  derived  from  the  marginal 
units  of  these  articles  would  thus  be  made  equal.  Each 
person  tries  so  to  round  up  his  consumption  that  the 
marginal  units  of  all  goods  give  the  same  pleasure  and 
hence  have  the  same  value.  There  is  thus  a  marginal 
unit  of  consumption  the  value  of  which  is  the  same  as 
the  value  of  other  marginal  units  making  up  the  con- 
sumption of  the  individual.  As  the  value  of  this  mar- 
ginal unit  of  consumption  rises  and  falls,  the  value  of 
each  marginal  unit  of  goods  tends  to  rise  or  fall  to  a 
like  degree.  Movements  in  value  are  therefore  general 
and  in  the  same  direction.  A  rise  in  the  value  of  any 
commodity  causes  the  consumer  to  use  a  little  less  of 
every  other  commodity  so  as  to  decrease  the  value  of 
the  first  article  by  producing  more  of  it.  A  new  equilib- 
rium is  formed  in  which  each  marginal  unit  has  a  slight 
addition  to  its  value  because  the  consumer's  wants  are 
less  fully  supplied  in  every  direction. 

Value  is  thus  measured__m_.utility  and_shows  the 
degree  to  which  consumer's  wants  are  supplied.  In 
distinction  to  this  price  is  the  quantity  of  one  article 
that  must  be  given  in  exchange  for  another.  It  is  thus 
an  o^bjective  measurement  of  goods  by  other  goods. 


Work  and  Pay 


The  price  of  a  loaf  of  bread  is  the  quantity  of  meat, 
sugar,  or  other  articles  for  which  it  exchanges.  If  the 
price  of  a  commodity  rises,  it  means  that  the  holders  of 
the  commodity  can  exchange  it  for  larger  quantities  of 
other  articles.  The  prices  of __aJJ,  .goods  cannot  go  uj3 
or  down  together.  There  would  then  be  no  change 
in  the  ratio  of  exchange,  and  hence  no  change  in  the 
price  of  any  article.  There  can  therefore  be  no  general 
movement  in  the  prices.  Some  must  go  down  that 
others  may  go  up.  Herein  changes  in  value  differ 
from  those  in  price.  The  former  always  move  in  one 
direction ;  the  latter  in  diverse  directions.  The  move- 
ments of  the  one  are  general;  those  of  the  other  are 
always  particular  and  localized. 


FIG.  I 


Consumers'  Surplus 


Producers'  Surplus 


Costs 


To  represent  the  relations  existing  between  values, 
costs,  and  utility,  in  a  diagram,  the  increments  of  the 
commodity  consumed  are  measured  by  the  length  of 
the  base  line  ab.  The  degree  of  utility  is  measured 
upward  from  the  base  line,  and  in  the  case  of  the  initial 
increment  the  amount  equals  the  line  ad.  Each  subse- 
quent increment  will  have  less  utility,  and  if  the  differ- 
ent increments  are  arranged  in  order  of  the  intensities  of 
the  pleasures  derived  from  them,  the  line  dc  will  repre- 
sent the  decline  of  utility  as  the  number  of  units  of 


1  8  The  Theory  of  Prosperity 

commodity  increase.  The  line  be  represents  the  utility 
of  the  final  unit  of  consumption,  and  the  figure  abed 
shows  the  amount  of  utility  derived  from  the  whole  con- 
sumption of  an  individual.  It  is  assumed  that  the  con- 
sumer takes  first  that  unit  of  goods  giving  him  most 
pleasure  and  that  he  turns  to  some  other  commodities 
when  they  give  him  more  pleasure.  At  a  dinner  served 
in  one  course  he  will  eat  first  this  and  then  that  accord- 
ing to  his  fancy,  coming  back  for  additional  increments 
of  the  earlier  articles  when  the  intensity  of  desire  for 
the  articles  he  is  eating  is  reduced.  If  the  different 
increments  of  the  dozen  articles  on  the  table  be  ar- 
ranged in  the  order  he  consumes  them,  a  diagram 
representing  the  degree  of  his  pleasure  would  assume  a 
form  like  the  one  given  above. 

The  consumption  of  all  the  individuals  in  a  com- 
munity or  nation  can  also  be  represented  by  this 
diagram  if  their  feelings,  sentiments,  and  habits  are 
nearly  enough  alike  to  create  a  normal  type.  In  the 
diagram,  be  is  the  marginal  increment  of  consumption 
whose  utility  determines  the  value  of  every  other  incre- 
ment. The  figure  abcc  shows,  therefore,  the  total  value 
of  all  the  articles  consumed,  while  ecd  shows  the  con- 
sumer's surplus  ;  that  is,  the  amount  of  utility  that 
consumers  enjoy  above  the  value  of  the  goods. 

The  cost  of  these  articles  is  represented  by  the  dis- 
tance between  the  lines  af&nd  ab.  Those  first  produced 
have  a  low  cost,  which  gradually  increases  as  more  is  pro- 
duced. The  line  d/thus  gradually  diverges  from  the  line 
ab  and  is  furthest  off  at  the  margin  of  consumption 
where  it  equals  bf.  The  figure  abf,  therefore,  repre- 
sents total  costs.  The  difference  between  total  value 


Work  and  Pay  19 

(abce)  and  total  utility  (abed)  is  the  consumers'  sur- 
plus. The  net  gain  of  the  producers  is  (afce)  the 
difference  between  total  value  (abce)  and  total  costs 
(abf), 

These  two  funds,  the  difference  between  total  utility  The  Social 
and  total  costs,  are  the  social  surplus.  In  estimating  SurPlus- 
its  amount,  all  the  pleasures  that  directly  or  indirectly 
result  from  work  must  be  put  on  one  side  of  the 
account,  and  on  the  other  all  the  pains.  In  primitive 
societies  the  pains  are  many,  while  the  pleasures  are 
few  in  quantity  and  limited  in  variety.  The  original 
qualities  of  land  and  men  were  not  of  a  character  to 
encourage  production.  Man,  not  being  adjusted  to 
nature,  got  from  her  a  most  reluctant  response  to  his 
demands ;  but  the  surplus  increased  with  each  new  ad- 
justment between  the  two. 

Perhaps  the  most  notable  forward  steps  in  man's 
adjustment  to  nature  are  due  to  improvements  in  pro- 
ductive processes  and  machinery.  Each  invention  does 
away  with  pain  and  increases  the  quantity  of  attain- 
able pleasure.  Greater  knowledge  results  in  a  closer 
adjustment  to  nature,  and  more  capital  enables  men 
to  provide  for  the  satisfaction  of  their  wants  a  long 
time  before  they  appear.  They  can  thus  take  advan- 
tage of  serial  production  and  reduce  work  to  a 
minimum.  Transformations  worked  in  the  character 
and  capacities  of  men  are  also  striking  and  important. 
Skill  is  acquired  only  by  persistent  and  painful  applica- 
tion ;  the  habits  fitting  men  for  productive  enterprises 
are  the  slow  product  of  years  ;  but  when  a  race  has 
become  industrial,  these  aptitudes,  qualities,  and  inclina- 
tions are  transmitted  from  generation  to  generation,  as 


2O  The  Theory  of  Prosperity 

a  permanent  possession  of  the  race.  What  the  fathers 
did  with  effort  the  sons  do  naturally,  and  their  capa- 
city is  transmitted  in  a  more  perfect  form  to  their 
successors.  The  skill  and  knowledge  earned  by  an- 
cestors come  to  children  in  pleasing  forms.  Education 
is  a  pleasure  that  has  no  costs,  the  period  devoted  to 
it  being  the  most  joyous  of  all.  The  young  of  each 
generation  start  on  their  productive  epoch,  having 
already  in  hand  a  large  surplus  for  which  no  costs 
were  endured. 

Changes  in  nature  and  in  producers  are  not  the 
only  causes  of  an  increasing  surplus.  As  consumers, 
men  also  become  better  adjusted  to  the  goods  nature 
provides.  A  primitive  man  has  few  wants,  and  these 
are  mainly  for  articles  that  nature  provides  with  diffi- 
culty. A  few  thousand  of  such  men  roam  over  a 
continent  and  yet  have  their  wants  but  partially  sup- 
plied. With  progress  new  articles  are  produced  that 
supply  intenser  wants,  and  at  the  same  time  all  goods 
are  more  abundant  in  quantity.  The  appetites  and 
passions  of  men  are  also  modified,  making  them  do 
and  want  what  is  more  in  conformity  with  their  en- 
vironing conditions.  Each  new  want  limits  the  field 
in  which  old  appetites  dominated,  and  the  great  variety 
of  new  impulses  soon  brings  the  old  under  control. 

There  are  thus  many  aids  to  adjustment  that  never 
have  costs,  and  the  surplus  grows  as  they  increase  in 
importance.  Nature  acts  gratuitously ;  industrial  quali- 
ties are  a  free  inheritance ;  the  fund  of  permanent 
capital  is  always  increasing,  and  men's  tastes  and  habits 
are  so  modified  that  they  drain  nature  less  severely, 
while  the  consumption  of  individuals  becomes  more  har- 


Work  and  Pay  21 

monious  and  less  exclusive ;  at  the  same  time  the  antago- 
nism of  individual  interests  is  reduced,  enabling  men 
to  devote  less  time  to  mere  struggle  and  more  to  true 
adjustment.  With  all  these  forces  in  full  operation  the 
surplus  grows,  pains  decrease,  and  contentment  becomes 
general.  The  old  problems  about  costs  becoming  sub- 
ordinate, they  can  no  longer  account  for  the  value  of 
goods.  What,  then,  limits  the  supply  of  goods  if  mar- 
ginal costs  do  not  equal  marginal  utility  ?  This  legiti- 
mate question  must  be  answered  before  the  difficulties 
connected  with  the  problems  of  value  can  be  cleared 
away. 

Every  healthy  person  starts  the  day  with  a  fund  of  The  origin 
surplus  energy,  the  expenditure  of  which  is  pleasing,  °  vaue> 
and  makes  work  pleasurable  while  it  lasts.  Each 
one  can  produce  a  number  of  goods  without  any  cost, 
and  these  goods  when  consumed  create  a  fund  of 
surplus  energy  by  which  the  next  day's  work  can  be 
carried  on.  It  would  seem  possible  therefore  to  live 
and  work  without  pain.  Men,  through  the  expenditure 
of  energy,  would  replace  the  articles  they  withdrew 
from  the  common  stock  for  consumption,  and  could 
take  freely  what  they  wanted  without  reducing  the 
supply  of  goods  so  much  that  they  would  have  a  value. 
Goods  would  thus  be  as  free  as  the  water  in  a  brook  or 
as  the  free  goods  produced  by  nature  without  the  aid 
of  man.  This  condition  of  affairs  is  prevented  by  the 
growth  of  wants.  The  satisfaction  of  one  want  awakens 
a  desire  for  new  goods  to  satisfy  other  wants  not  before 
felt.  The  surplus  energy  of  individuals  has  now  more 
channels  of  exit,  and  less  of  it  can  be  expended  in  the 
production  of  any  one  good.  With  an  increase  of  satis- 


22  The   Theory  of  Prosperity 

factions  there  goes  normally  an  increase  of  surplus 
energy,  but  the  rate  of  increase  of  the  latter  is  not  so 
great  as  that  of  the  former.  Wants  grow  more  rapidly 
than  productive  power.  This  is  an  elementary  law,  to 
which  there  are  no  exceptions. 

It  might  be  said  that  wants  grow  geometrically,  while 
productive  power  grows  arithmetically ;  but  whether 
this  be  so  or  not,  the  lack  of  productive  power  to  satisfy 
all  of  men's  wants  is  clearly  apparent.  A  limitation  of 
the  supply  of  goods  is  a  necessary  result  of  this  relation 
of  wants  to  productive  power.  No  amount  of  energy, 
no  degree  of  pleasure  in  production,  would  avoid  this 
limit  to  the  supply  of  goods.  Value  is  thus  a  necessary 
phenomenon  even  under  the  best  of  social  conditions. 
It  is  due  to  the  fact  that  goods  must  be  produced,  and 
not  to  the  fact  that  the  act  of  production  is  painful. 
Goods  produced  pleasurably  do  not  have  a  less  value  on 
this  account.  On  the  contrary,  they  have  a  greater 
value.  Men  who  enjoy  their  whole  life  have  more 
wants,  and  thus  feel  the  limitation  to  the  supply  of 
goods  more  keenly  than  do  those  who  suffer  from  pain. 
Every  new  pleasure  forces  up  the  margin  of  consump- 
tion and  leaves  a  greater  field  of  unsatisfied  wants. 
Values  thus  increase  through  the  pressure  of  wants. 
Pain,  on  the  other  hand,  limits  the  wants  of  men  to  the 
few  things  that  allay  it,  and  thus  decreases  values 
until  at  length  a  point  is  reached  where  suicide  is 
rational.  Then  only  is  the  sum  of  values  equal  to  costs. 

Thus  the  real  cause  of  value  is  not  to  be  found  in 
men's  pains,  but  in  the  limitation  of  goods  due  to  the  lack 
of  time  to  produce  more.  Each  day  has  only  twenty-four 
hours,  of  which  eight  are  for  sleep,  and  the  remaining 


Work  and  Pay  23 

sixteen  must  be  divided  between  production  and  con- 
sumption. With  the  growth  of  productive  power  there 
are  goods  to  consume,  and  more  time  is  needed  for  their 
consumption.  The  working  day  must,  therefore,  grow 
shorter  with  each  increase  of  productive  power.  The 
supply  of  goods  being  less  in  proportion  to  men's  wants, 
values  go  up.  A  keener,  more  active  life  results,  but  in 
the  end  men  are  farther  than  ever  from  complete  satis- 
faction of  their  wants. 

The  need  of  limiting  the  time  of  consumption  de-  / 
stroys  some  of  the  utility  of  goods.  A  dinner  eaten  in  { 
fifteen  minutes  affords  less  enjoyment  than  if  an  hour 
is  taken.  Houses  that  can  be  enjoyed  but  a  few  hours 
a  day,  horses  that  can  be  but  occasionally  used,  clothes 
that  are  seldom  worn,  and  other  articles  that  from  lack 
of  time  are  rarely  seen,  lose  much  of  their  possible 
utility.  There  is  thus  an  interference  in  consumption 
due  to  the  fact  that  no  one  article  can  be  fully  enjoyed. 
This  loss  of  utility  sets  the  natural  limit  to  the  day's 
work.  Men  stop  working  when  the  utility  of  the  new 
article  is  less  than  the  loss  of  utility  in  the  use  of  the  "j 
already  existing  stock  of  goods,  suffered  because  the 
time  of  their  consumption  is  cut  down.  The  value  of 
each  moment's  time  to  a  consumer  is  fixed  by  the  gain 
in  utility  which  a  larger  enjoyment  of  the  existing  stock 
of  goods  would  afford.  Any  article  that  takes  this  time 
to  produce  will  not  be  made  unless  its  utility  is  greater 
than  the  value  of  the  producer's  time  to  him  as  a  con- 
sumer. The  marginal  article  produced  always  has  this 
value,  and  thus  measures  the  interference  in  consump- 
tion. These  facts  may  be  illustrated  by  the  following 
diagram. 


The  Theory  of  Prosperity 


Let  the  line  ab  represent  the  sixteen  hours  of  each 
day  used  in  production  or  consumption.  The  utility  of 
the  first  article  produced  is  equal  to  ac,  while  that  of 
the  succeeding  increments  is  measured  by  the  distance 
from  the  line  ab  to  cd.  At  d  there  is  no  surplus  and 
hence  no  further  inducement  to  work.  The  line  ae  is 
drawn  so  as  to  measure  the  loss  due  to  the  lack  of  time 
to  enjoy  fully  the  goods  already  produced.  This  loss  is 
slight  on  the  first  articles  produced,  but  when  the  period 
of  production  is  extended  through  many  hours,  the  loss 
becomes  serious.  Each  added  hour  of  production 
forces  the  consumption  of  goods  into  narrower  limits, 
until,  at  length,  their  utility  is  practically  destroyed. 


FIG.  II 


The  line  ae  therefore  diverges  farther  and  farther  from 
ab  as  the  working  day  is  lengthened.  It  also  diverges 
more  rapidly  if  the  productive  power  of  the  laborer  is 
high  than  if  it  is  low.  The  more  goods  he  produces  in  a 
given  time,  the  greater  is  the  interference  in  consump- 
tion and  the  greater  is  the  loss  resulting  from  a  further 
use  of  his  time  in  production.  Under  these  conditions 
the  working  day  is  not  equal  to  the  line  ad,  representing 
the  time  during  which  a  surplus  can  be  obtained.  Its 
length  is  fixed  by  the  point  g  where  the  lines  ac  and  cd 
cross.  The  line  fg  measures  the  surplus  at  this  point, 


rttt*/  TV/I/  25 

\A_JJ  >»-  .«.  i_»   .  ., 

and  it  also  measures  the  loss  through  the  interference 

in  consumption.     The  gains  of  working  would  be  offset 

by  loss  through  the  impaired  consumption  of  the  goods  •>-  '• 

already  produced.     The  line  fg  is  therefore  the  margin 

of    consumption,  and   each   increment  of    goods   has  a 

value  equal  to  its  utility.     It  does  not,  therefore,  need  • 

the  presence  of  pain  to  give  a  value  to  goods  if  they  are    *   '• 

produced  by  men  with  varied  wants.     The   limitations 

of  time  suffice  to  check  the  increase  in  the  supply  of 

goods,    and    goods    limited    in    quantity    always    have  -41 


value.  So  long  as  wants  grow  more  rapidly  than  pro- 
ductive power,  the  supply  of  goods  will  fall  short  of  the 
demand. 

There   are    two  methods    by  which  to  measure   the  Cost  and 
obstacles  which  stand  in  the  way  of    production.      A  exPense- 
man  may   think  of   himself    as   in  direct  contact  with 
nature,    struggling    to    obtain    from    it    the    objects  of 
desire  ;    or   he  may  think  of   himself    as  possessing  a 
number  of    articles,  and    exchanging  them  with  other 
persons.      In  the  first  case  the  measure  of  value  is  the  -    ^^«« 

pain  or  discomfort  of  this  direct    conflict  with  nature,  jk.u.  , 
An  isolated  person  would  be  conscious  of  nothing  but    .  .  .,  ^  \.\> 
of  the  difficulty  arising  when  he  tries  to  provide  for  his      :  ....  .  ..^ 

wants.  Each  bushel  of  wheat  or  pound  of  cotton  would 
mean  a  certain  amount  of  effort  expended,  and  the 
value  of  the  product  would  be  equal  to  the  pain  of_jiis 
effort,  and  the  accompanying  loss  of_time. 

But  when  a  complicated  industrial  system  arises,  men 
supply  their  wants  by  exchanging  what  they  have  pro- 
duced for  goods  possessed  by  others.  The  problem 
now  is  to  get  from  others  as  large  a  quantity  as  possible 
of  their  goods,  in  exchange  for  a  given  amount  of  one's 


v       v  - 

i***-^*        X  .*..-x. 

,-26'     </"          --The  Theory  of  Prosperity 

*f  r  <  X          ~* 

-T          ,'  ,-X          > 

own  goods.      The   measure  _of  value   now  is  not  the 
vr'    ^    obstacle  imposed  by  nature,,  but  the  -amount  of  goods 

N.  ^    ^"  ^v*^ 

that  must  be  given   up  to   induce  others  to  make  an 
exchange. .....  If  a  bushel  of   wheat  must  be  given  for 

four  yards  of  cloth,  it  makes  no  difference  to  the  man 
who  gets  them  in  exchange  what  the  difficulties  of  pro- 
duction were.      The  cloth  gets  its  value   to   the   new 
owner  from   the   vjilue  of_  the  _wheat   he   gave   up   to' 
*  secure  it. 

In   the   exchange   of  goods  the  costs    play  no   part 
^5        ^unless    the   person  who  receives  the  goods  can    make 

*  "*?•-  .->  * 

them  himself.  Were  a  tailor  to  demand  six  pairs  of 
shoes  for  a  suit  of  clothes,  the  shoemaker  would  not 

i-*1"'  ^J11 

make  the  exchange  if  he  could  make  a  suit  of  clothes 
with  less  labor  than  he  could  make  the  shoes.  Here 
costs  would  at  least  check  the  rise  in  price  of  clothes, 

and  if  the  tailor  could  also  make  shoes  he  would  have 

• » 

a  similar  check  to  the  rise  in  price  of  shoes.     But  these 

4*  *' 

checks  to  the  rise  in  price  of  exchanged  articles  disap- 

£^S  ^.''  — ^ 

pear  under  complex  industrial  conditions.  Individual 
producers  cannot  make  the  articles  they  get  through 
exchange,  nor  can  they  always  produce  the  whole  of  the 
article  upon  which  their  purchasing  power  depends. 

The  division  of  labor  takes  from  workmen  the  ability 
;  to  make  many  of  the  articles  they  consume.  They_in- 
crease  their  purchasing  power  only  by  producing  more 
efficiently  the  article  they  offer  in  exchange.  This 
fact  throws  costs  into  the  background  as  a  regulator 
of  value.  The  interest  is  now  centred  not  in  the  cost  of 
production  of  the  commodities  secured  in  exchange,  but 
in  their  expense  measured  in  terms  of  the  goods 
given  up  for  them.  Cost  is  the  effort  of  producing 


v_A_i__-  «.  c_ft_rt^_«_fi.        y-^-^  , 

f-  ~     V        ~  ^£i/  • 

b-i.     yog   •    1         Ufc*-»      v._t_»-..»....i..*  •— »-«  *-...»  .v 

^)  N        - 

-Work  and  Pay    J\  27"^ 

•jT.     L.  u"^'    S"*-"1P-     *"  v-w-4-....  ^-.i^»^u3^.  -pu^*. 

commodities;    expense  is  the  inducement  necessary  to    p^ 
get   others   to   produce  them,  and  this  inducement  is 

JB~ — - —  *     —  €L^*  *  T"    ^  **'*   ^-*~*- 

usualJX_nTu.ch  greater  than  the  sum  of  the  jroducer's 

costs.      If    a  workman    gets   three   dollars   a   day   in/1 

one  occupation,  a  demand  for  his  labor  in  some  other     l  lil-*~<" 

direction  is  effective  only  when  a  larger  sum  is  offered 

him.     It  matters  not  that  his  costs  are  only  a  dollar  a  *~~S^u>Jr 

day.     He  will  not  give  up  a  position  worth  three  dollars 

a  day  except  for  a  greater  wage.     There  is  in  this  case 

a  sacrifice  of  a  surplus  ojf_twq  dollars  a  day,  and  one  \  .      » 

must  be  compensated  for  his  sacrifice  as  well  as  for  his  I 

actual  cost.      Expense  must  always  equal  the  sum  of  }  \~ 

sacrifice  and  cost. 

Sacrifices  differ  from  costs  in  that  they  demand  the 
giving  up  of  one  form  of  surplus  to  get  another;  but  there 
is  no  pain  involved  in  this  substitution.     The  only  pains 
are  the  costs  resulting  from  man's  contact  with  nature. 
The  net  surplus  of  a  society  is  not  the  total  utility  of 
its   goods   minus  the   sum  of   its    sacrifices  and  costs. 
Sacrifices  represent  merely  a  sum  of  utility  taken  from 
one  group  of  persons  and  given  to  others.     It  is  there- 
fore a  problem  of  distribution  and  not  a  question  of  the  ^ 
difficulty  of  production.       From  the  total  utility  of  all  ! 
the  goods  there  is  but  one  real  deduction.     Total  utility  ! 
minus  the  costs  equals  the  social  surplus.     But  the  mar- 
ginal increment  of  consumption  must  have  a  value  equal 
to  marginal  expense,  and  this  equals  the  sum  of  costs    ^w^-^v    v* 
and   sacrifice.      Expense   thus    includes  an  element  of     v^,...^  «-«v 
pleasure   as   well   as  an   element   of  pain.      With   the 
advance  of  society  the  former  increases  and  the  latter 
declines.     Sacrifices  thus  become  the  main  element  in 
the  measurement  of  value,  and  in  the  end  may  become 


28 


TJie   TJicory  of  Prosperity 


its  sole  measure.  Painless  effort  would  still  have  a 
high  value  if  the  unsatisfied  wants  of  men  were  many 
and  intense.  A  free  workman  has  many  opportunities 
for  employment,  and  these  enable  him  to  demand  of 
his  employer  a  compensation  for  the  loss  of  surplus  he 
could  get  from  them.  The  following  figure  will  illus- 
trate these  points. 

Let  the  quantity  of  goods  be  measured  on  the  line  ab, 
the  costs  by  the  distances  between  the  lines  ab  and  cf, 
and  the  sacrifice  by  the  distances  between  the  lines  fc 
and  fe.  The  workman  will  think  both  of  the  cost  and 
the  sacrifice  involved  in  production,  and  will  demand  a 


FIG.  Ill 


reward  equal  to  the  distance  between  ab  and  fc.  The 
consumer,  however,  will  have  in  mind  only  the  relation 
of  utility  to  expense.  The  pleasure  derived  from  each 
increment  will  be  compared  with  what  he  must  lose  to 
get  it.  The  net  utility  of  each  additional  increment  of 
consumption  grows  less,  and  its  expense  grows  greater, 
until  the  two  quantities  are  equal.  The  point  c  indi- 
cates where  the  surplus  of  the  consumer  falls  to  zero. 
This  will  be  the  margin  of  his  consumption,  and  the 
point  where  production  ceases.  No  further  exchange 
takes  place,  because  one  of  the  parties  has  nothing  to 
gain  by  it.  The  producer  still  has  a  surplus  equal  to 


Work  and  Pay  29 

the  line  cc,  but  he  secures  no  gain  by  more  work,  the  - 
interference  in  his  consumption  due  to  longer  hours  of  ' 
work  creating  a  loss  equal  to  the  gains  from  this  work.  ' 

The  length  of  the  working  day  may  be  viewed  from  The  normal 
two  standpoints.     The  employer  is  interested  in  the  net  workins 

day. 

surplus  left  after  the  cost  of  the  labor  has  been  paid. 
The  pleasures  and  pains  felt  by  the  laborer  are  disre- 
garded except  as  they  affect  the  net  surplus  of  industry] 
retained  by  the  employer.  It  is  in  his  interest  to  con- 
tinue production  as  long  as  the  net  produce  grows. 
Should  work  stop  before  this  point,  the  laborer  has  a 
net  surplus  in  all  he  produces.  The  return  on  capi-i 
tal,  however,  is  less  than  it  might  be.  The  working  day; 
extends  to  the  point  where  cost  and  value  are  equal  only 
when  the  number  of  laborers  is  so  great  that  they  are 
willing  to  work  for  a  bare  living.  The  classical  econo- 
mists assume  that  this  is  always  the  case.  The  laborer 
is  said  to  work  for  a  living,  while  the  capitalist  is  work- 
ing for  a  profit.  The  interests  of  the  two  thus  coincide, 
and  production  continues  until  the  final  act  has  no  sur- 
plus. Dependent  laborers  are  always  in  this  position; 
They  must  work  for  necessities  and  not  for  utility.  The 
working  day  is  therefore  extended  until  a  further  exten- 
'sion  of  the  working  time  yields  no  profit. 

A  free  workman  works  for  utility  as  well  as  his 
employer,  and  hence  his  only  rational  standard  is  the 
gross  or  total  utility  derived  from  a  day's  work.  Hav- 
ing the  option  of  working  for  other  employers,  or  of 
entering  some  business  on  his  own  account,  he  cannot 
be  compelled  to  work  merely  to  increase  a  net  produce 
in  which  he  does  -not  share.  Net  utility  is  a  standard 
only  when  one  person  desires  to  measure  the  gain  he 


v 


3O  The  Theory  of  Prosperity 

gets  in  working  with  or  for  another  person.  So  long  as 
A  gets  a  net  gain  in  working  with  B  it  pays  him  to  con- 
tinue the  operation.  The  point  of  no  net  gain  marks 
the  place  where  this  cooperation  ends,  but  it  does  not 
determine  the  point  where  A  will  cease  working.  He 
might  have  stopped  earlier  if  he  had  been  alone  or  he 
might  have  worked  longer.  When  alone,  the  gross 
-  return  in  utility  controls  his  activity.  A  Crusoe  or  a 
\  peasant  farmer  will  work  while  his  energy  lasts,  but 
will  stop  when  fatigue  is  felt.  He  wants  the  greatest 
amount  of  utility,  but  this  is  secured  only  through  the 
greatest  amount  of  energy.  If  he  works  until  his  pains 
balance  his  pleasures,  his  energy  falls  off  and  the  next 
day  he  is  less  capable  of  work.  Great  energy  and  pain 
are  incompatible;  the  latter  must  be  shut  out,  or  the 

former  will  be  lost.     The  conservation  of  this  energy  de- 

>*  °-/ 

pends  upon  a  series  of  transformations  that  must  be  com- 
' 
$'      plete  and  uninterrupted.     Energy  exerted  on  materials 

produces  goods,  which  when  consumed  create  utilities, 
and  the  enjoyment  of  utilities  through  physiological 
changes  restores  the  surplus  energy.  There  should 
be  no  loss  in  this  round  of  changes.  The  energy  of 
the  next  day  should  at  least  be  equal  to  that  of  the  day 
before.  Pains  always  involve  some  loss  in  this  fund  of 
surplus  energy.  A  pleasure  counteracted  by  a  pain 
does  not  end  in  the  restoration  of  the  surplus  energy 
with  which  the  circle  of  changes  began.  If  many  pains 
must  be  endured,  the  tone  of  the  workman  is  lowered, 
his  power  to  enjoy  utility  falls  off,  and  his  surplus  energy 
disappears.  He  becomes  a  mere  automaton  valuable  to 
society  only  through  the  net  surplus  he  creates  for 
others. 


\ 


Work  and  Pay  31 

In  the  consideration  of  pain  two  kinds,  the  tempo- 
rary  and  the  enduring,  must  be  kept  apart.  There 
are  bound  up  with  production  many  irregularities  and 
accidents  involving  pain.  Harvests  are  irregular ;  cold 
snaps  and  heat  waves  come  suddenly  ;  floods  and  fires 
devastate ;  machinery  breaks  down ;  and  in  each  case 
pain  must  be  endured  to  save  a  destruction  of  property 
or  life.  A  capacity  for  the  endurance  of  pain  must  be 
cultivated  to  meet  these  exigencies,  but  the  motives  for 
facing  them  boldly  should  not  be  a  mere  desire  to  get  a 
greater  individual  pleasure  than  pain.  The  general  wel- 
fare should  be  in  the  foreground.  To  endure  pain  for 
hire  is  degrading.  A  soldier  should  not  fight  because 
the  pain  of  getting  wounded  is  compensated  for  by  the 
pleasures  of  the  campaign  or  by  the  leisure  of  the  hos- 
pital. The  end  of  war  is  the  removal  of  some  great  evil 
through  which  a  nation  secures  greater  permanent  pleas- 
ures with  no  deduction  or  tribute.  Each  temporary 
pain  in  industry  should  be  faced  so  as  to  remove  it. 
The  loss  of  one  individual  in  this  case  is  made  up,  not 
by  his  compensation,  but  by  the  feeling  that  all  men 
are  better  off.  "  Never  to  endure  pain  for  mere  wages  " 
is  a  rule  that  removes  actions  of  this  kind  from  an 
economic  to  a  moral  plane. 

Permanent  pains  have,  however,  no  moral  quality. 
Men  who  suffer  from  them  sink  in  the  scale  of  being, 
and  lose  in  the  end  all  their  moral  qualities.  Pure 
fatigue,  encountered  every  day,  belongs  to  this  class. 
Cost,  as  it  is  understood  in  economics,  is  the  regular 
endurance  of  fatigue  due  to  the  extension  of  the 
working  day  after  the  surplus  energy  of  the  worker 
is  exhausted.  The  pains  of  each  day  counteract  its 


7        - 

32  77/r   Theory  vf  Prosperity 

*j.    \  pleasures,  leaving  no  normal  surplus  of   utility  to   be 

*g»-  ^ 

j  transformed  back  into  surplus  energy.  The  physical 
being  thus  deteriorates,  the  capacity  for  pleasure  is 
gradually  lost,  and  work  becomes  a  drudgery  performed 
only  under  pressure.  Men  should  face  temporary  pains 
boldly,  but  for  the  grind  of  mere  fatigue  they  should 
accept  no  compensation.  The  expenditure  of  surplus 
energy  is  pleasurable  and  adds  to  the  total  sum  of  the 
day's  enjoyment.  Work  should  cease  before  it  is  gone. 
There  are  two  ways  in  which  the  relation  of  the  curve 
of  activity  and  that  of  utility  may  be  viewed.  The  fund 
of  activity  may  be  put  to  use  in  creating  material  objects 
or  in  modifying  the  external  environment.  There  is 
then  a  return  current  of  goods  capable  of  creating  satis- 
faction. It  may  also  be  said  that  the  nutriment  and 
stimulus  of  satisfactions  create  a  fund  of  surplus  energy 
which  finds  a  vent  in  pleasurable  activity.  In  either 
case  the  connection  of  the  curve  of  activity  and  that  of 
the  utility  of  satisfaction  is  plain.  Utility  should  pro- 
duce activity,  and  activity  should  produce  the  sources  of 
•  i>.  fAJ5..»)^*  satisfaction.  When  utility  produces  activity,  the  con- 
sumer is  normal.  When  energy  produces  goods  for 

•v*  W.,-.^_      *    f      »-•? 

consumption,  the  producer  is  adjusted  to  his  environment. 
The  pleasure  of  getting  would  then  be  as  intense  as  that 
of  consuming,  the  motives  for  production  being  stronger 
or  weaker  as  the  desire  for  the  goods  grew  or  fell  off. 
In  this  case  a  strong  desire  for  an  article  would  be  ac- 
companied by  an  equally  strong  desire  for  activity  in  the 
direction  demanded  by  its  acquisition.  As  the  want 
became  partially  satisfied  the  intensity  of  the  pleasure 
of  consumption  would  diminish,  and  at  the  same  time 
the  desire  for  activity  in  this  direction  would  be  reduced. 


nr  V 


o 


Work  and  Pay 


33 


The  curve  of  pleasurable  activity  would  then  be  the 
same  as  the  curve  of  utility  created  by  consumption. 
The  normal  working  day  under  these  conditions  is 
represented  by  the  following  diagram. 

Let  the  quantity  of  goods  produced  in  a  day  be 
measured  on  the  line  ab,  their  utility  by  the  distances 
between  the  lines  ab  and  cf,  and  the  pleasure  or  pain  of 
their  production  by  the  relation  of  the  lines  ab  to  dg. 
The  laborer  starts  the  day  with  a  fund  of  surplus  energy 
which  it  is  pleasurable  to  exert.  The  distance  of  the 
line  dc  below  ab  measures  the  pleasure  of  activity.  At 
c  the  surplus  energy  is  exhausted  and  the  work  ceases 


FIG.  IV 


to  be  agreeable.  If  continued  longer,  it  becomes  pain- 
ful to  the  amount  indicated  by  the  distance  between  cb 
and  eg.  The  normal  motives  inducing  a  free  man  to 
produce  cease  to  be  effective  at  e.  He  works  no  longer, 
unless  some  danger  threatens  the  goods  he  has  already 
acquired,  or  exceptional  circumstances  arise.  A  storm, 
a  fire,  or  an  accident  will  stimulate  his  energies,  but 
when  the  crisis  is  past  he  will  increase  the  period  of 
rest  until  his  normal  condition  is  restored. 

The  workman  begins  each  day  with  a  fund  of  surplus 
energy  equal  to  area  acd,  in  the  expenditure  of  which 
he  produces  goods  to  the  amount  of  ac.  These  goods 


34  The  Theory  of  Prosperity 

in  consumption  yield  a  utility  equal  to  the  area  aefc, 
making  the  total  pleasure  of  the  day  equal  to  the  area 
cdfe.  This  utility  in  turn  is  transformed  into  surplus 
energy,  giving  the  workman  a  new  fund  of  energy 
equal  to  the  area  aed  with  which  to  work  the  next  day. 
The  work  could  be  kept  up  in  this  way  from  day  to 
day  without  any  deterioration  on  the  part  of  the 
laborer.  Should  the  working  time  be  extended  beyond 
!  the  point  e,  the  pains  endured  counteract  some  of  the 
\  utility  created,  and  it  therefore  is  not  transformed  back 
!  again  into  surplus  energy.  Each  day  of  such  work 
would  reduce  the  laborer's  fund  of  energy,  cut  off 
his  pleasures,  and  force  upon  him  a  mere  mechanical 
existence. 

Should  the  laborer  view  his  welfare  in  terms  of  value 
instead  of  measuring  it  in  terms  of  utility  and  energy, 
the  same  conclusion  would  be  reached.  As  additional 
quantities  of  goods  are  produced,  the  interference  in 
his  consumption  increases.  Each  article  is  less  fully 
enjoyed  if  he  uses  more  of  his  time  in  production. 
The  distance  from  the  line  ae  to  of  measures  the  inter- 
ference in  consumption.  At  the  point  e  this  loss  is  as 
great  as  the  gain  in  utility  derived  from  the  further 
production  of  goods. 

The  line  ef  marks  the  margin  both  of  production  and 
of  consumption,  and  therefore  would  be  the  limit  to 
the  increase  of  value.  So  long  as  the  condition  of  the 
workman  is  normal,  it  does  not  matter  whether  he 
measures  his  welfare  on  the  basis  of  utility,  energy,  or 
value.  They  all  coincide  because  their  amounts  are 
dependent  on  the  same  ultimate  conditions.  If  the 
surplus  is  fully  conserved,  energy  is  transformed  into 


Work  and  Pay  35 

goods,  goods  into  utility,  and  utility  back  again  into 
energy.  While  this  fund  is  stored  up  in  the  human 
system  it  is  measured  by  the  surplus  energy  it  can 
create ;  when  in  the  form  of  goods  it  is  thought  of  as 
values,  and  when  goods  are  consumed  it  becomes  utility. 
Unless  the  fund  is  not  conserved  in  its  transforma- 
tions, the  three  modes  of  measuring  harmonize  in  their 
results.  The  normal  condition  of  the  laborer  is  deter- 
mined by  this  harmony  of  results.  The  working  day 
cannot  be  so  extended  that  the  pain  of  fatigue  regularly 
occurs,  without  destroying  that  part  of  the  social  surplus 
stored  up  in  him.  All  painful  effort  is  overtime,  and 
should  be  paid  for  at  higher  rates.  Each  individual 
must  conserve  his  own  part  of  the  social  surplus,  or 
society  suffers  as  well  as  himself. 

The  theory  that  costs  determine  value  rests  upon  the  False  meas- 
notion  that  labor  is  disagreeable.     There  have  always  urements  of 

costs. 
been,  however,  ways  of    expending   energy  that   were 

regarded  as  pleasurable.  The  warrior  exerts  himself 
more  violently  than  a  workman,  and  yet  each  of  his 
acts  is  looked  upon  as  a  source  of  enjoyment.  So,  too, 
hunting,  fishing,  and  athletic  sports  are  regarded  pleas- 
urable occupations.  The  end  the  sportsman  or  the 
athlete  has  in  mind  is  not  the  product  he  creates,  but 
the  pleasure  of  the  pursuit.  It  cannot  be  said  that 
activity  or  even  strenuous  exertion  is  painful  so  long 
as  there  are  ways  of  exerting  energy  that  every  one 
highly  enjoys. 

Labor  is  irksome  not  because  regular  bodily  move- 
ments cause  pain,  but  because  of  the  disagreeable 
associations  connected  with  it.  In  early  societies  men 
were  divided  into  the  free  and  the  servile.  The  free 


36  The   Theory  of  Prosperity 

man  showed  his  superiority  by  abstaining  from  pro- 
duction. A  servile  class  worked  while  he  protected 
them,  or  at  least  prevented  others  than  himself  from 
exploiting  them  ;  and  thus  work  is  associated  with  ser- 
vility. The  notion  that  rest  is  better  than  activity  is 
due  to  these  ancestral  conditions.  An  overworked 
servile  class  readily  acquires  the  feeling  that  the  highest 
state  of  existence  is  one  of  inactivity.  Cut  down  the 
hours  of  labor  so  that  some  surplus  energy  remains, 
and  other  forms  of  activity  will  spring  up  with  pleasing 
associations.  With  new  social  conditions  other  associa- 
tions can  be  formed,  making  industrial  occupations  hon- 
orable, and  thus  making  them  pleasurable.  Surplus 
energy  is  the  normal  result  of  the  consumption  of 
goods.  The  utility  of  these  goods  is  merely  an  index 
that  they  can  through  physiological  changes  be  trans- 
formed into  surplus  energy.  The  more  the  utility,  the 
greater  is  the  amount  of  surplus  energy  they  are  capa- 
ble of  generating.  The  fund  of  energy  that  a  man  can 
exert  should  be  as  great  as  the  fund  of  utility  enjoyed 
in  consumption.  Normally  the  man  who  consumes  what 
he  produces  would  generate  enough  surplus  energy  to 
reproduce  the  goods  used  up  in  consumption.  And 
these  acts  would  be  physiologically  pleasurable.  Con- 
sumption would  create  pleasing  mental  associations  to 
supplement  the  pleasing  physiological  sensations  if  the 
workman  were  sure  that  all  he  produced  would  be  his  to 
enjoy.  Isolate  a  man  from  all  his  fellow-men,  and  the 
associations  connected  with  work  are  agreeable.  It  is 
only  when  labor  is  socially  despised  that  he  feels  its 
irksomeness  and  tries  to  avoid  it. 

Misery  and  costs   are  not  synonyms.     There  are  a 


Work  and  Pay  37 

thousand  sources  of  misery  which  have  no  connection 
with  men's  endeavor  to  supply  their  wants.  Those  that 
do  not  work  are  often  at  the  point  of  committing  sui- 
cide. Work  may  even  destroy  the  misery  due  to  other 
causes  and  make  the  worker  happier  than  though  it 
were  not  performed.  A  woman  worrying  over  servants 
and  social  etiquette  may  be  much  less  happy  than  a 
mother  who  does  her  own  work  and  cares  for  her  chil- 
dren. A  poorly  cooked  meal  makes  a  clay  miserable, 
and  yet  the  sufferer,  if  a  worker,  charges  it  up  as  costs 
when  it  ought  to  be  put  on  the  ledger  as  due  to  his 
social  life. 

Production  is  a  contact  with  nature.  This  usually 
has  its  ten  hours  each  day.  The  other  fourteen  hours 
belong  to  leisure  and  to  social  life.  The  balance  of 
pleasures  and  pains  of  these  hours  should  not  be  con- 
fused with  the  similar  balance  of  the  hours  of  work.  If 
the  happiness  of  home  life  is  marred  by  discord  ;  if  food 
is  not  properly  cooked ;  if  sleep  is  disturbed ;  if  the 
social  status  is  not  satisfactory ;  or  if  other  evils  reduce 
the  happiness  of  the  hours  of  leisure  and  recreation,  — 
the  pains  endured  are  not  economic  costs.  They  have 
nothing  to  do  with  production,  and  it  only  creates 
confusion  if  the  worker  gets  his  two  ledgers  mixed. 
Costs  are  the  necessary  pains  of  production.  Men 
produce  to  consume,  and  their  pleasure  in  consumption 
outweighs  the  pain  endured  in  production.  But  this 
does  not  mean  that  they  should  add  up  all  the 
pleasures  enjoyed  in  a  day  and  compare  them  with  all 
their  pains  under  the  title  of  costs.  Is  life  worth  living? 
is  one  problem  ;  Do  costs  exceed  the  utilities  produced  ? 
is  another.  The  former  is  decided  by  gross  figures;  the 


3  8  The  Theory  of  Prosperity 

latter  demands  a  critical  analysis  of  the  returns.  The 
utilities  in  the  latter  case  are  the  net  utilities,  the  differ- 
ence between  the  gross  pleasures  of  the  day  and  the 
pains  that  grow  out  of  or  are  associated  with  them. 
This  net  sum  is  the  economic  utility  for  which  men 
strive,  and  the  sum  of  which  should  exceed  costs.  The 
pleasure  of  living  minus  the  misery  connected  with 
leisure  must  exceed  the  costs  of  production.  Only 
when  the  ledger  is  kept  in  this  form  can  the  nature  of 
costs  be  clearly  seen,  for  much  of  the  so-called  costs 
of  work  are  parts  of  the  misery  of  leisure.  A  man 
does  not  feel  that  working  is  dishonorable  or  degrading 
when  working.  This  feeling  comes  during  his  leisure 
hours,  when  he  associates  with  people  who  do  not  need 
to  work.  Their  opinions  interfere,  not  with  his  produc- 
tion, but  with  his  social  status.  It  is  not  correct  to  put 
the  social  penalties  imposed  on  workers  among  costs. 
Production  is  a  relation  between  men  and  nature,  and 
only  nature's  pains  are  costs.  Social  penalties  belong 
to  the  miseries  of  leisure,  and  should  be  charged  up  to 
their  proper  account. 

There  is  another  fund  of  misery  that  is  wrongfully 
charged  up  as  costs.  Dissipation  is  a  bad  use  of  one's 
leisure  and  goods  in  which  men  indulge  from  a  bad 
method  of  keeping  their  accounts.  They  think  of  the 
immediate  pleasure  of  a  vicious  act  as  its  utility,  and 
associate  its  evil  effects  with  the  costs  of  the  succeed- 
ing epochs  of  production.  A  man  who  spends  his 
wages  Saturday  night  and  Sunday  on  liquor,  finds  him- 
self on  Monday  without  the  surplus  energy  needed  to 
do  his  work.  The  bad  effects  of  the  dissipation  linger 
all  the  week  and  make  his  life  miserable.  These  pains, 


Work  and  Pay  39 

which  are  really  the  penalties  of  dissipation,  he  associ- 
ates with  the  work  he  is  doing  and  imagines  that  his 
costs  are  great.  Had  he  used  his  wages  to  secure 
normal  pleasures,  none  of  the  pains  would  have  been 
felt  and  the  work  would  have  been  agreeable. 

When  men  feel  the  effects  of  age,  they  charge  up 
the  pains  they  endure  to  the  work  they  have  done.  In 
reality,  however,  most  of  such  pains  are  due  to  acts 
connected  with  their  periods  of  leisure.  They  have 
carelessly  exposed  themselves,  indulged  in  harmful 
luxuries,  deprived  themselves  of  necessary  sleep,  worn 
improper  clothing,  and  done  a  thousand  other  acts  to 
exploit  temporary  pleasures  or  to  maintain  their  social 
position.  Most  diseases  come  from  stomach  troubles, 
weak  lungs,  heart  failure,  apoplexy,  and  other  results  of 
indulgence  and  carelessness.  The  diseases  of  the 
well-clothed,  well-housed,  well-fed  laborer  are  few,  and 
these  alone  can  be  properly  reckoned  as  costs. 

In  judging  of  costs  it  is  necessary  to  keep  in 
mind  the  contrast  between  struggle  and  adjustment. 
Struggle  is  a  relation  between  men.  By  it  is  deter- 
mined who  shall  have  the  superior  positions,  who 
shall  consume  the  goods  produced,  and  who  shall  dis- 
place his  neighbor.  All  these  efforts,  no  matter  how 
painful,  merely  dispose  of  what  has  been  produced. 
They  do  not  aid  production ;  on  the  contrary,  they  les- 
sen its  amount.  Production  is  determined  by  the  degree 
of  adjustment;  distribution,  by  the  intensity  of  struggle. 
The  one  follows  laws  fixed  by  nature  ;  the  other  is 
social  and  is  augmented  or  abated  by  the  customs 
and  institutions  of  society.  The  pains  of  struggle 
are  not  costs ;  they  are  endured  to  get  goods  away 


40  The  Theory  of  Prosperity 

from  others,  not  to  create  them.  Only  acts  of  adjust- 
ment are  production,  and  its  pains  alone  are  costs. 
But  even  these  acts  are  not  necessarily  costs.  The 
goods  enjoyed  by  men  are  not  wholly  the  results  of 
their  labors.  The  natural  power  of  the  land,  wind, 
water,  and  sun  help  men  in  production  and  are  em- 
ployed by  men  without  any  costs.  Besides  these  natural 
forces,  the  results  of  past  civilization  aid  in  the  re- 
duction of  costs.  The  original  qualities  of  the  land 
have  been  improved,  much  fixed  capital  created,  and 
many  obstacles  to  production  have  been  permanently 
removed.  Each  generation  finds  itself  better  off  than 
its  predecessor.  Great  improvements  have  also  been 
made  through  inventions,  discoveries,  and  other  addi- 
tions to  the  general  stock  of  knowledge.  Men  have 
also  been  made  better  by  the  transmission  of  industrial 
qualities.  Acts  painful  to  the  fathers  become  pleasur- 
able to  the  sons  through  inherited  modifications  of  the 
muscles  and  nerves.  Adjustment  thus  gradually  be- 
comes more  easy  unless  stopped  by  the  intensity  of 
struggle. 

All  these  considerations  must  have  weight  when  men 
seek  rationally  to  determine  their  costs.  A  struggle 
for  supremacy  must  be  prevented,  dissipation  avoided, 
and  disease  removed  before  all  pains  should  be  included 
in  costs.  When  this  time  comes,  the  surplus  energy  of 
men  will  be  great  enough  to  supply  their  wants  without 
extending  the  time  of  labor  beyond  the  point  where 
fatigue  begins.  In  the  meantime  costs  are  real,  but 
to  those  forced  into  unfavorable  positions  they  are  not 
as  great  as  they  seem,  and  have  little  influence  on  the 
value  of  goods.  The  less  fortunate  are  crushed  by  the 


Work  and  Pay  41 

pressure  of  struggle  and  not  by  the  pressure  exerted  on 
them  by  nature  in  the  form  of  costs.  Misery  is  not  a 
product  of  nature  :  it  is  man-made. 

The  surplus  is  the  net  proceeds  remaining  after  the 
expenses  of  production  have  been  paid.  This  fund  can 
be  used  for  enjoyment  without  interfering  with  the 
process  of  production.  It  is  the  difference  between  the 
cost  of  production,  including  the  replacement  of  fixed 
capital,  and  the  total  utility  goods  yield  when  used. 
There  is  thus  a  fund  continued  over  to  the  next  epoch 
of  production  to  aid  in  subsequent  production  and  one 
that  is  apparently  used  up.  The  distinction,  therefore, 
has  been  drawn  between  productive  labor  making  goods 
that  aid  in  subsequent  production,  and  unproductive 
labor  creating  utilities  destroyed  in  the  enjoyment. 
Each  epoch  of  production  starts  with  the  appropriation 
of  some  natural  forces,  agents,  or  material,  and  ends  in 
their  disappearance  by  consumption.  A  series  of  crea- 
tions, transformations,  and  final  destruction  of  goods 
make  up  the  economic  life  of  a  nation,  and  the  social 
surplus  seems  a  disappearing  fund  of  which  nothing 
more  is  heard. 

This  view  of  production  is  the  result  of  thinking  of  The  con- 
the  economic  process  merely  in  terms  of  goods.     Com-  servatlon  of 

the  social 

modities  appear  apparently  drawn  freshly  from  nature,  surpius. 
and  disappear  again  in  the  chaos  of  destroyed  material. 
But  while  the  material  returns  to  nature,  its  essence  is 
not  lost,  but  reappears  as  vital  energy.  Through  the 
enjoyment  of  utilities  the  body  is  refreshed  and  built  up. 
The  physiological  changes  following  the  enjoyment 
of  utilities  end  in  the  generation  of  energy  which  ex- 
presses itself  in  activity.  Productive  labor  is  that  which 


42  Tht  Theory  of  Prosperity 

reappears  in  goods ;  productive  consumption  is  that 
which  comes  to  sight  again  as  energy  capable  of  pro- 
ducing goods.  Even  if  the  economic  process  is  viewed 
solely  from  the  standpoint  of  goods,  the  normal  con- 
sumption of  individuals  indirectly  creates  goods  by 
creating  energy,  thus  making  future  production  possi- 
ble and  pleasurable.  In  each  epoch  one  fund  of  energy 
makes  capital  to  assist  the  production  of  the  subsequent 
epoch,  and  another  fund  is  through  consumption  trans- 
formed into  energy  again,  and  as  energy  utilizes  the 
productive  instruments  made  in  the  preceding  epoch. 
All  the  energy  of  the  first  epoch  thus  reappears  to 
assist  in  the  second.  Energy  under  normal  conditions 
is  never  lost.  It  reappears  again  and  again  so  long 
as  waste  or  needless  dissipation  are  avoided. 

The  social  surplus  is  thus  an  enduring  fund,  disap- 
pearing only  to  reappear  in  some  new  form.  Goods 
become  utilities,  utilities  are  transformed  into  energy 
which,  as  work,  creates  new  goods.  The  round  of 
change  is  perpetual,  and  in  all  of  its  changed  forms  the 
surplus  is  a  source  of  pleasure.  While  goods  are  being 
consumed,  the  enjoyment  is  called  utility ;  when  surplus 
energy  is  being  expanded,  another  fund  of  pleasure 
arises  from  the  love  of  activity ;  and  when  this  activity 
creates  goods,  they  in  their  relations  to  the  workmen  are 
the  source  of  aesthetic  pleasures.  Goods  destroyed  in 
use  are  utilities ;  aesthetic  feelings  are  aroused  not  by 
this  destruction,  but  by  the  contemplation  of  what  is 
produced,  and  through  the  relations  that  exist  between 
enduring  products.  Instead  of  these  two  funds  of 
pleasure  being  the  same,  they  are  opposing  uses  of 
goods.  The  aesthetic  element  disappears  when  the 


Work  and  Pay  43 

process  of  consumption  begins.  It  lies  in  the  relation 
of  goods  to  one  another  or  to  their  producers,  but  is 
never  a  relation  of  goods  to  their  consumers.  An 
aesthetic  complement  is  injured  by  any  loss  of  its  parts 
or  relations.  Goods  for  consumption  cannot  be  enjoyed 
without  this  loss.  The  two  kinds  of  pleasure  are  thus 
distinct,  and  they  in  turn  are  different  from  the  pleas- 
ure of  activity. 

In  its  circle  of  change  the  social  surplus  thus  assumes 
three  distinct  forms,  and  in  each  of  them  it  is  a  source 
of.  pleasure.  The  worth  of  life  is  not  to  be  measured 
by  the  utility  of  goods  consumed,  but  by  this  fund  plus 
the  pleasure  of  activity  and  aesthetic  enjoyment  of 
goods.  Utilities  that  do  not  reappear  as  pleasurable 
activity,  are  bad,  and  so  is  any  activity  that  does  not  end 
in  some  aesthetic  enjoyment.  The  test  of  each  is  that 
it  is  followed  by  the  pleasure  next  in  the  series.  There  < 
is  a  loss  of  the  social  surplus  if  the  pleasure  of  consump- 
tion has  not  as  a  sequence  an  equally  great  pleasure  of 
activity ;  and  a  similar  loss  results  if  the  energy  when  \ 
expended  does  not  reappear  in  aesthetic  forms  and  rela- 
tions of  equal  value  as  pleasures.  A  social  surplus  once-* 
created,  therefore,  should  be  a  permanent  possession  of 
society,  but  never  remaining  in  one  form  or  in  the  pos- 
session of  one  person.  Isolated  pleasures  represent 
either  a  loss  to  society  or  at  least  the  suppression  of 
a  part  of  the  surplus  until  the  enjoyer  throws  it  once 
more  into  the  common  fund  by  some  form  of  activity. 
Enjoyment  that  does  not  inspire  productive  activity 
stops  the  process  of  transformation  essential  to  the 
continuance  of  the  social  surplus. 

When  labor  is  painful,  a  part  of  the  surplus  is  de- 


44  The  Theory  of  Prosperity 

stroyed,  since  the  pain  neutralizes  an  equal  amount  of 
pleasure.  To  this  loss  must  be  added  that  due  to  dis- 
sipation. From  an  economic  standpoint  dissipation 
includes  every  use  of  goods  that  does  not  result  in  the 
building  up  of  the  body,  and  thus  fails  to  create  a  fund 
of  surplus  energy.  Many  utilities  give  satisfaction,  but 
through  overindulgence  weaken  instead  of  strengthen 
the  system.  The  normal  tendencies  of  society  check 
these  indulgences  and  so  vary  the  consumption  that  each 
utility  adds  something  to  the  vigor  of  the  body,  and  to 
the  motives  that  increase  future  activity.  When  this  is 
not  done,  a  part  of  the  social  surplus  is  destroyed, 
society  is  made  poorer,  and  workers  are  forced  back 
nearer  the  point  of  mere  existence.  The  losses  in  these 
directions  are  further  increased  by  every  form  of  dis- 
ease. Only  healthy  bodies  can  transform  utilities  into 
surplus  energy.  Sickness,  the  lack  of  sanitation,  leth- 
argy, or  any  form  of  imperfect  assimilation  lowers  the 
vitality  of  workers  even  more  promptly  than  does  pain- 
ful work  or  dissipation.  Where  these  evils  are  not 
avoided,  much  of  the  social  surplus  is  used  up. 

This  waste  of  surplus  is  reduced  by  each  step  in  the 
adaptation  of  men  to  external  conditions.  Inventions 
and  discoveries  make  overwork  unnecessary,  while  the 
greater  variety  of  occupation  reduces  the  need  of  so 
concentrating  effort  that  it  is  painful.  Through  the 
elimination  of  the  weak,  and  through  a  stricter  adhe- 
sion to  the  moral  code,  dissipation  becomes  less  tempt- 
ing. Morality  puts  a  check  on  the  use  of  goods  for 
mere  pleasure  and  favors  their  use  in  such  ways  that 
they  reappear  as  energy.  Moral  rules  often  seem  mere 
negations  because  they  prevent  dissipation;  but  to  the 


Work  and  Pay  45 

degree  that  they  check  it  they  force  men  to  be  tem- 
perate in  the  use  of  goods,  and  thus  create  energy. 
Disease  is  also  reduced  in  amount  by  the  process  of 
progressive  adaptation.  The  transformation  of  food 
into  nutriment  is  thus  made  more  complete ;  energy 
is  increased  and  more  of  it  is  expended  in  production. 
The  circle  of  change  by  which  goods  increase  energy 
and  energy  is  expended  in  making  goods,  becomes  more 
perfect  with  each  advance  toward  a  normal  life.  The 
normal  man  has  no  losses  from  imperfect  assimilation, 
dissipation,  or  disease.  A  surplus  once  created  remains 
forever  active,  creating  pleasure  in  each  of  its  reappear- 
ing forms. 

When  the  working  day  and  the  motives  for  activity  rrhe  wages 
are  normal,  costs  have  little  to  do  with  the  fixing  of  the  M  moblle 

labor. 

rate  of  wages  among  free  laborers.  Most  of  their  pains  i 
are  not  due  to  production,  but  to  dissipation,  disease, 
and  other  causes  more  closely  connected  with  the 
period  of  rest  and  recreation  than  with  the  working 
hours.  These  evils  have  their  sources  in  the  homes 
of  workmen,  not  in  their  workshops.  Even  if  they 
suffer  each  day  an  amount  of  pain  equal  to  their 
total  enjoyment,  there  would  still  be  a  large  surplus  of 
pleasure  from  the  period  of  production,  because  much 
of  this  pain  is  in  no  way  connected  with  it.  All  man's 
pleasures  have  an  economic  origin  ;  most  of  his  pains 
have  not.  There  is  thus  a  large  surplus  in  the  area  of 
industrial  activity. 

The  prevailing  theory  of  wages  by  emphasizing  costs 
makes  them  the  determining  element  in  fixing  wages. 
It  is  assumed  that  there  is  a  downward  pressure  on  each 
group  of  laborers,  causing  wages  to  fall  until  the  laborers 


46  The  Theory  of  Prosperity 

least  skilful  or  least  favorably  situated  are  forced  to 
the  wall  by  their  costs  exceeding  the  value  of  what 
they  produce.  Each  group  has  its  rate  of  wages  sus- 
tained by  the  elimination  of  the  weakest  laborers.  The 
better  laborers  have  a  differential  advantage  giving 
them  a  slight  surplus,  which  they  lose  when  more  of 
the  weak  laborers  are  forced  to  the  wall.  The  protec- 
tion of  the  strong  thus  lies  in  the  presence  of  the  weak. 

The  rate  of  wages  may,  however,  be  protected  by 
the  advantages  of  the  strong  as  well  as  by  the  costs 
of  the  weak.  Free  laborers  have  a  choice  of  occupa- 
tions. To  secure  them  in  one  industry,  a  wage  must 
be  offered  equal  to  what  they  can  get  elsewhere.  If 
no  employer  will  give  them  this  alternative,  they  can 
work  for  themselves.  Under  these  conditions,  wages 
are  fixed  by  the  option  which  exists  of  entering  some 
other  occupation.  Any  fall  in  the  rate  of  wages  in 
one  industry  causes  some  workmen  to  avail  themselves 
of  this  option.  The  number  of  workmen  in  the  first 
industry  is  thus  reduced  and  the  rate  of  wages  restored. 
The  movement  from  industry  to  industry  that  holds  up 
the  rate  of  wages  is  among  the  strong  of  each  group. 
The  weak  members  of  the  group  may  not  possess  this 
option,  yet  they  will  gain  by  the  power  of  the  latter  to 
withdraw.  The  strong  thus  protect  the  weak  instead 
of  the  reverse,  as  is  maintained  by  the  advocates  of 
the  cost  theory  of  wages. 

To  compare  these  theories,  let  a  group  of  laborers 
be  represented  by  the  letters  from  A  to  Z,  of  which 
A  is  the  strongest,  Z  the  weakest.  Let  the  other 
members  be  represented  by  the  letters  nearer  to  A  if 
their  strength  approaches  that  of  A,  or  nearer  to  Z  as 


Work  and  Pay 


47 


their  weakness  approximates  his.  The  series  from 
A  to  Z  would  then  show  their  relative  strength  and 
weakness.  Assume  also  that  in  the  diagram  dis- 
tances from  the  line  ab  to  ad  represent  the  varying 
costs  of  these  persons,  increasing  from  that  of  A  to  Z, 
and  that  distances  from  ab  to  be  represent  the  re- 
turn in  the  alternate  occupations  open  to  them.  The 
option  of  Z  would  be  worth  little  to  him,  but  A's  option 
would  be  as  valuable  as  his  present  position. 


A.. 


FIG.  V 


Under  these  conditions,  a  lowering  of  the  rate  of 
wages  would  cause  the  withdrawal  of  both  A  and  Z. 
A  would  make  use  of  his  option,  while  Z  would  be 
forced  to  the  wall.  Either  theory  of  wages  might,  then, 
be  held  to  be  true  and  to  account  for  the  facts.  But 
if  A's  option  is  greater  in  amount  than  Z's  costs,  or 
Z's  costs  greater  than  A's  option,  only  one  of  the 
theories  would  be  correct.  What,  then,  is  A's  option 
worth  and  how  does  it  compare  with  Z's  costs  ?  Plainly 
this  is  decided  by  the  stage  of  civilization  in  which  the 
workmen  live.  A's  option  increases  in  value  and  Z's 
costs  decrease  with  every  step  in  industrial  progress, 
and  in  advanced  societies  the  former  exceeds  the  latter. 
Free  laborers  have  valuable  options,  and  their  wages 


48 


The  Theory  of  Prosperity 


are  determined   by  the  options  of  the  strong  in  each 
industrial  group. 

To  show  how  A  uses  his  option,  let  the  value  of  the 
options  of  the  members  of  two  groups  M  and  N  be  again 
represented  by  the  distances  between  the  lines  ab 
and  cd.  In  group  N  the  strongest  member  is  A,  who 
can  remain  where  he  is  or  enter  group  M.  The  induce- 
ment is  not  great  enough  to  impel  action  so  long  as 
the  difference  in  wages  is  only  twenty  cents,  but  any 
reduction  of  the  wages  of  his  group  below  one  and  a 
half  dollars  will  cause  him  to  enter  the  other  group. 


A- 


— Z 


FIG.  VI 


A-- 


The  obstacle  to  the  change  may  lie  in  the  breaking  up 
of  pleasant  social  relations  or  in  the  need  of  saving  so 
that  he  can  prepare  himself  for  the  new  occupation  and 
secure  the  necessary  tools  or  capital.  He  may  also 
spend  more  on  the  education  of  his  children  and  thus 
put  them  in  the  better  occupation  even  if  he  cannot 
change  himself.  He  would  thus  indirectly  reduce  the 
number  of  his  class  and  help  to  restore  their  wages. 
Some  of  the  strongest  members  of  each  class  move  up 
to  better  occupations,  and  their  withdrawal  or  possible 
withdrawal  keeps  up  the  wages  of  the  weaker  members 
of  their  group.  There  is  always  a  stream  of  progres- 
sive individuals  working  up  from  their  present  station. 


Work  and  Pay  49 

The  descendants  of  each  group  move  up  to  better  posi- 
tions, leaving  what  their  fathers  had  to  those  coming 
from  lower  groups.  Even  in  the  slums  of  great  cities 
there  are  many  who  push  up  into  better  social  condi- 
tions. While  this  movement  continues  it  is  the  strong  ^ 
who  protect  the  weak,  and  hold  for  them  advantages 
that  they  could  not  secure  for  themselves.  Z  does  not 
sink  in  the  scale  of  existence  because  of  A's  monopoly,] 
and  his  wages  remain  far  above  the  costs  he  endures. 

There  is  a  downward  movement,  but  it  is  due  to  dissi- 
pation and  not  to  costs.  Some  will  indulge  in  vicious 
practices  and  thus  destroy  their  industrial  qualities ; 
or  they  may  be  careless,  and  thus  break  down  their 
health'  or  destroy  their  family  by  a  disregard  of  sanitary 
and  other  vital  conditions.  Disease  and  other  dissipa- 
tion to  some  extent  thus  cut  down  the  number  in  each 
group.  They  operate,  however,  to  keep  up  rather  than 
to  cut  down  wages  because  men  become  careless  and 
dissipated  far  above  the  point  where  their  costs  equal 
their  total  enjoyment.  Men  will  also  turn  into  tramps 
or  live  off  their  friends  and  relatives  long  before  their 
costs  destroy  their  surplus.  The  opportunities  of  the 
criminal,  the  tramp,  and  the  pauper  are  too  great  to 
allow  the  wages  of  workmen  to  be  forced  to  a  minimum. 
They  and  other  social  dependents  form  the  lower  stra- 
tum of  society  and  use  an  option  of  which  those  least 
fit  for  industrial  enterprises  can  always  avail  themselves. 

The  relative  position  of  the  different  industrial  groups 
is  seen  in  Diagram  VII,  the  line  cd  again  determining 
the  value  of  alternate  occupations.  In  each  group,  A 
has  an  option  of  equal  value  to  his  present  position. 
His  wages  cannot  be  forced  down  without  causing  his 


5O  The  Theory  of  Prosperity 

withdrawal.  The  other  members  of  the  group  thus  get 
the  wages  A  demands  and  have  the  same  advantage 
from  his  option  that  he  has.  The  movement  is  from 
the  lower  to  the  higher  groups.  The  highest  group 
has  the  greatest  monopoly  power  and  its  members  can 
the  most  readily  protect  themselves.  Each  lower 
group  gets  its  protection  from  the  group  above  it,  to 
which  its  strongest  members  withdraw  if  their  wages  are 
depressed  below  the  normal  difference  between  the  two 
groups.  Every  class  thus  has  some  option  open  to  it, 


"^^ 

A»  -z 

2 

FIG.  VI 

"^•^ 

AU  z 

i 

"^^ 

A              7 

.n.                    Hj 

M 

N 

0 

P 

and  hence  enjoys  some  monopoly  power.  The  key 
to  the  situation,  however,  lies  in  the  highest  industrial 
class.  So  long  as  its  members  open  up  new  opportuni- 
ties to  labor  and  increase  their  incomes,  every  other 
class  in  a  measure  participates  in  their  monopoly  power 
and  raises  its  rate  of  wages.  The  push  of  the  energetic 
business  man  increases  the  monopoly  power  of  every 
class  below  him.  Wages  are  thus  set  by  that  portion 
of  the  world's  workers  having  the  least  pains.  The 
monopoly  power  of  each  group,  gained  through  the 
options  of  its  strongest  members,  is  the  sole  determi- 
nant of  wages  and  is  the  one  thing  for  which  laborers 
should  seek.  New  options  can  do  what  no  amount  of 
effort  in  other  directions  can  accomplish. 


CHAPTER    II 

MONOPOLY  ADVANTAGE 

PRODUCTION  is  primarily  a  problem  of  values  and  Market 
wants.  Each  workman  strives  after  an  equilibrium  Pnces- 
between  the  outgo  of  energy  and  the  return  flow  of 
goods.  As  wants  increase  in  intensity,  more  energy  is 
exerted,  a  better  adjustment  to  nature  is  attained,  and 
a  greater  quantity  of  goods  comes  back  to  the  worker. 
While  goods  thus  increase,  wants  increase  more  rapidly, 
leaving  the  consumer  a  margin  of  unsatisfied  wants 
higher  than  before.  Were  the  relations  between  men 
and  nature  constant,  a  solution  of  the  problems  of  value 
would  clear  up  all  the  difficulties  of  production.  Every 
change  in  value  would  mean  some  alteration  in  the 
pressure  of  wants  or  in  the  relations  of  men  to  nature. 
All  articles  would  thus  go  up  in  value  with  social  prog- 
ress and  fall  together  in  decadent  epochs. 

In  contrast  to  these  slow  universal  changes,  problems 
of  price  are  created  by  local  disturbances  affecting  but 
a  part  of  the  industrial  world.  Some  new  obstacle  to 
the  increase  of  production  is  met  in  certain  industries, 
and  a  larger  relative  share  of  the  labor  and  capital 
must  be  moved  into  them.  Improvements  may  also  be 
made  in  other  industries,  thus  liberating  labor  and 
capital.  Each  irregularity  in  the  environment  also 
causes  the  productive  power  of  men  to  vary,  and  makes 
goods  more  or  less  abundant  as  the  conjunction  of  these 

51 


52  The  Theory  of  Prosperity 

accidental  or  temporary  circumstances  are  more  or  less 
favorable.  Fire,  wind,  flood,  drought,  and  other  natural 
and  social  phenomena  affect  the  output  of  goods  and 
alter  from  time  to  time  their  relative  amounts. 

Because  of  these  variations  in  supply,  market  prob- 
lems arise.  Each  producer  having  a  deficit  or  a  super- 
fluity of  goods  seeks  a  market  to  make  up  the  one  or 
to  get  rid  of  the  other.  All  goods  come  to  a  market  of 
which  producers  have  a  greater  supply  than  of  other 
commodities,  and  they  get  from  a  market  articles  they 
produce  in  less  quantities  than  they  need.  Market  rela- 
tions equate  differences  in  the  relative  demand  for 
goods,  and  thus  determine  price.  The  exchange  of 
products  depends  upon  two  sets  of  estimates,  —  that  of 
the  buyer  and  that  of  the  seller.  Goods  change  hands 
many  times  before  raw  material  is  transformed  into 
products  fitted  to  supply  consumers'  needs.  Each 
producer  is  a  buyer  of  material  from  other  producers 
and  a  seller  of  it  to  those  who,  between  him  and 
the  consumer,  work  with  the  more  finished  products. 
He  is  thus  a  buyer  in  one  set  of  relations  and  a  seller 
in  another.  In  the  factory  or  on  the  farm  he  is  the 
maker  of  particular  goods.  On  the  market,  he,  like 
every  other  producer,  is  a  buyer  and  a  seller  ;  his  gains 
are  determined  by  the  excess  of  the  price  of  what  he 
sells  above  that  of  what  he  bought.  Unless  the  seller 
is  a  mere  speculator,  he  is  always  a  producer,  for  he 
has  transformed  the  commodity  and  in  some  way  in- 
creased its  utility.  This  may  mean  production  in  the 
sense  that  the  qualities  and  form  of  goods  are  altered ; 
or  it  may  mean  their  transportation  to  regions  where 
•they  are  rarer;  or  it  may  mean  the  holding  of  them 


Monopoly  Advantage 


53 


until  a  time  when  they  will  have  increased  utility  to 
consumers.  The  seller  may  have  thus  created  a  place 
value,  a  time  value,  or  a  form  value,  but,  in  any  case,  he 
has  created  value,  and  is  a  producer.  We  should  think 
of  him,  therefore,  as  a  seller  and  neglect  his  particular 
function  in  production,  the  details  of  the  process  being 
ignored  to  permit  a  concentration  of  interest  on  the 
phenomena  of  price.  The  result  of  these  exchanges 
between  buyers  and  sellers  is  expressed  in  money. 
While  consumers  think  of  their  utility,  sellers  think 
only  of  their  money  gains,  which  are  determined  by  the 
movement  in  prices.  Market  prices  are  thus  objective 
ratios  of  exchange  existing  between  different  com- 
modities. The  quantity  of  a  good,  and  the  different 
ratios  of  its  exchange  expressed  in  money,  are  the  facts 
needed  to  determine  its  price  under  particular  condi- 
tions. The  causes  fixing  the  price  of  a  commodity  can 
be  illustrated  by  the  following  diagram. 


FIG.  VIII 


Buyers'  Gain 


Sellers'  Gain 


Expense 


Let  the  base  line  ab  represent  the  quantity  of  the 
article,  using  the  upright  lines  to  represent  its  price  and 
its  expense.  If  but  one  increment  of  commodity  is 
produced,  the  expense  is  equal  to  the  line  ac,  which 
increases  with  a  greater  production  until  the  quantity 
ab  is  produced,  when  the  expense  is  bd.  If,  on  the 


KA  0— ~ 


54  The   Theory  of  Prosperity 

other  hand,  but  one  increment  of  the  commodity  comes 
on  the  market,  its  price  is  ae.  Additional  quantities 
would  lower  the  price  to  buyers  until  the  quantity  ab 
is  produced,  when  the  price  falls  to  bd.  On  all  the 
earlier  increments  there  is  a  buyer's  gain  and  a  seller's 
gain  in  the  exchange.  At  bd  both  these  have  disap- 
peared, and  no  further  exchange  takes  place.  This 
then  becomes  the  normal  price  until  the  conditions  of 
production  or  consumption  are  altered. 

For  every  commodity  a  diagram  of  this  kind  pictures 
the  relations  existing  between  sellers  and  buyers. 
Sellers  have  gains  and  expenses  which  are  estimated  in 
money.  The  gains  are  the  difference  between  expense 
and  the  price  of  the  article  sold.  Expense  is  the  money 
price  of  that  which  is  represented  in  terms  of  utility  in 
Diagram  III  by  the  area  abcf.  The  two  diagrams  repre- 
sent the  same  things,  but  from  different  points  of  view. 
Consumers  reckon  in  utility,  sellers  in  money  ;  both  have 
in  mind  the  same  commodities,  and  their  estimates, 
though  made  in  different  terms,  must  in  the  end 
correspond. 

To  the  seller  also  it  is  a  matter  of  indifference 
whether  expenses  are  costs  or  sacrifice  to  those  with 
whom  he  is  related  as  a  producer.  The  seller  pays  the 
market  price  for  the  use  of  land,  labor,  and  capital.  The 
relative  expense  of  each  unit  of  commodity  he  brings  on 
the  market  may  be  low,  and  yet  he  may  have  used  the 
highest-priced  land  and  labor.  A  large  surplus  to  the 
landlords,  capitalists,  and  laborers  is  consistent  with 
large  sellers'  gains  to  the  producer  who  uses  their 
products  or  efforts.  The  cost  of  labor  may  be  low  and 
at  the  same  time  the  relation  of  the  laborers'  costs  to 


Monopoly  Advantage 


55 


their  surplus  may  also  be  low.  Or,  to  put  the  same  fact 
in  another  way,  the  seller  of  a  commodity  may  have  low 
expenses  at  the  same  time  that  wages  are  high.  Ex- 
pense is  not,  therefore,  the  same  as  cost.  A  large 
expense  fund  may  mean  low  costs. 

The  two  diagrams  (III  and  VIII),  while  similar  in 
form,  really  represent  a  different  group  of  facts  and 
relations.  The  one  represents  the  relations  between 
producers  and  their  environment.  The  better  those 
relations,  the  larger  the  surplus  and  the  lower  the  costs. 
The  other  represents  the  relations  of  buyers  and  sellers. 
This  is  at  bottom  a  relation  between  the  individual 
members  of  a  society  each  striving  to  improve  his 
relative  position.  On  the  market  the  loss  of  one 
person  is  the  gain  of  another.  When  in  contact  with 
nature  the  advantage  of  each  worker  is  an  advantage  to 
others. 

For  the  sake  of  clearness  of  thought  the  terms  utility, 
value,  surplus,  and  cost  are  used  when  the  simple  re- 
lations of  wants  to  effort  are  referred  to.  In  market 
relations,  however,  producers  are  buyers  or  sellers  and 
are  interested  only  in  prices.  Though  they  do  not 
appear  actively,  the  consumer  and  producer  are  the 
cause  of  market  relations.  From  the  moment  effort 
is  exerted  in  production  until  the  consumer  gets  the 
finished  goods,  all  exchanges  are  on  a  market,  and  all 
prices  are  money  prices.  Ignore  all  these  intermediate 
steps  through  which  goods  go  on  their  way  from  their 
makers  to  those  who  finally  enjoy  them,  and  only  a 
group  of  subjective  relations  remains,  such  as  those 
pictured  in  Diagram  III.  Subjective  values  treat  of  the 
ultimate  relations  of  producers  to  consumers ;  market 


56  The   Theory  of  Prosperity 

prices  are  concerned  with  the  movement  of  goods 
between  them.  The  phenomena  of  price  indicate  a 
movement  of  commodities.  Utility  appears  at  con- 
sumption. 

The  two  points  of  view  thus  supplement  each  other, 
but  must  be  kept  distinct.  The  one  view  pictures  the 
producer  in  contact  with  nature,  absorbed  in  the  pleas- 
ures and  pains  of  production  and  consumption.  The 
other  view  does  not  recognize  the  results  of  effort  until 
goods  are  brought  on  a  market  ready  to  pass  into  the 
hands  of  another  person,  and  are  lost  sight  of  again 
when  withdrawn  from  the  market  by  a  person  intending 
to  use  them.  The  first  view  presents  a  world  like  that 
of  Crusoe,  in  which  there  is  but  one  person,  who  is  thus 
incapable  of  any  but  subjective  relations.  The  second 
takes  into  account  only  a  world  of  two  or  more  persons, 
and  then  only  of  their  mutual  relations.  The  market 
world  knows  nothing  of  nature  and  the  obstacles  to  the 
satisfaction  of  wants.  A  Crusoe  world  is  equally  oblivi- 
ous to  market  relations. 

It  should  be  noticed  that  buyers'  gain  is  not  the  same 
as  the  consumers'  surplus,  which  is  real  while  the  former 
is  only  hypothetical.  If  a  consumer  uses  two  ounces  of 
tea,  the  utility  of  the  first  ounce  is  greater  than  that  of 
the  second,  and  is  a  real  utility  for  which  he  cannot  be 
compelled  to  pay.  For  like  reasons  all  of  the  con- 
sumers' surplus  is  a  real  fund  of  which  the  consumer 
cannot  be  deprived,  except  by  conditions  inducing  him 
to  cut  down  his  use  of  the  article.  Buyers'  gains  do 
not  represent  real  gain  to  individuals  or  to  society,  but 
show  merely  what  would  have  been  paid  for  an  article 
under  other  conditions  from  those  that  exist.  Assum- 


Monopoly  Advantage  57 

ing  that  a  thousand  pounds  of  tea  on  a  given  market 
would  sell  for  fifty  cents  a  pound,  and  that  two  thousand 
pounds  would  sell  for  only  forty  cents  a  pound,  it  does 
not  follow  that  the  dealer  would  make  ten  cents  a  pound 
extra  on  the  first  thousand  pounds  if  two  thousand 
pounds  were  sold.  He  would  sell  all  his  tea  at  the  same 
price  and  have  the  same  gain  on  the  second  as  on  the 
first  thousand  pounds.  The  consumers,  however,  would 
have  a  real  surplus  on  the  first  half  of  what  they  used. 
Buyers'  gains  represent  only  the  effect  of  changes  in 
supply  on  price,  and  form  no  part  of  the  income  of 
society. 

Nor  is  it  true  that  there  is  a  close  connection  between 
the  consumers'  surplus  and  the  buyers'  gain.  The  latter 
could  not  be  high  in  cases  of  deficient  supply,  unless  the 
former  was  also  high.  The  market  price  of  an  article 
cannot  be  forced  above  its  utility  to  the  consumer.  But 
it  does  not  follow  from  this  that  the  price  of  a  rare  article 
can  be  forced  up  until  the  consumer  has  no  surplus. 
Usually  the  consumer  has  a  power  of  substitution 
through  which  the  upward  movement  in  price  is 
checked  long  before  his  surplus  is  exhausted.  The\ 
user  of  tea  can  also  drink  coffee  or  cocoa.  The  maxi- 
mum price  of  tea,  therefore,  is  fixed  at  the  point  where 
he  will  change  over  from  tea  to  coffee  or  cocoa.  Were 
the  power  of  substitution  complete,  that  is,  could  the 
consumer  enjoy  the  three  articles  equally,  there  would 
be  no  buyers'  gain,  because  the  price  of  no  one  of  the  ( 
articles  could  be  forced  up  without  destroying  its  sale.  j 
So  the  buyers'  gain  measures  not  the  consumers'  sur- 
plus, but  the  incompleteness  of  his  power  of  substitution. 
Under  ordinary  conditions  the  former  is  but  a  fraction 


58  The  Theory  of  Prosperity 

of  the  latter,  and  always  follows  different  laws.  With- 
out confusing  the  fundamental  relations  that  make  the 
distinction  of  subjective  and  objective  values  important, 
the  two  cannot  be  thought  of  as  one  or  as  depending 
on  the  same  conditions.  Clearness  of  thought  demands 
the  use  of  distinct  terms  to  express  contrasted  groups 
of  ideas. 

If  prices  are  sustained,  some  clearly  defined  obstacle 
to  their  fall  exists ;  if  they  fall,  some  definite  force  must 
be  in  action.  What  are  these  two  forces,  the  equilibrium 
of  which  fixes  price,  and  how  do  they  operate  ?  If 
prices  are  kept  up  by  the  presence  of  costs  they  must 
fall  until  the  value  of  goods  does  not  exceed  their  cost 
of  production.  This  lowest  point  is  also  normally  the 
highest,  because  when  producers  compete  with  pro- 
ducers, the  power  of  underselling  is  the  test  of  industrial 
efficiency.  Prices  gradually  fall  until  a  further  reduction 
is  stopped  by  the  cost  of  production  becoming  equal  to 
the  value  of  the  goods  produced.  Competition  of  pro- 
ducers is  thus  the  effective  force  reducing  values,  while 
costs  are  the  obstacles  that  sustain  them.  The  two 
forces  acting  together  bring  about  an  equilibrium  that 
determines  what  consumers  must  pay  for  goods  under 
normal  conditions.  If  prices  must  gradually  fall  so  long 
as  progress  reduces  costs,  the  gains  of  consumers  are  the 
measure  of  progress,  and  to  them  come  all  the  benefits 
of  improved  processes.  If  costs  disappear  through  a 
complete  adjustment  of  man  to  nature,  values  would  also 
disappear.  There  would  then  be  no  obstacle  to  their 
downward  movement.  The  goal  of  progress  is  thus 
the  elimination  of  values  and  the  creation  of  a  social 
£.cate  in  which  all  goods  are  free. 


Monopoly  Advantage 


59 


This  doctrine  is  attractive,  but  I  doubt  if  it  can  be 
maintained.  In  some  way  prices  are  held  up,  and 
consumers  deprived  of  the  benefits  of  better  methods 
of  production.  It  is  also  plain  that  enormous  profits 
are  made  by  certain  producers,  and  that  they  divert  to 
themselves  the  surplus  that  theoretically  should  go  to 
consumers.  Even  without  monopolizing  corporations  this 
tendency  can  be  seen ;  and  in  the  fields  where  they 
control  production  an  actual  rise  in  price  often  occurs. 
Either  the  motives  of  producers  are  incorrectly  ana- 
lyzed, or  at  present  some  abnormal  tendency  is  domi- 
nant in  industry.  I  think  we  must  accept  the  first 
alternative.  The  condition  of  production  and  motives 
of  producers  are  more  normal  than  ever  before,  and  can 
be  better  seen  than  during  any  earlier  period.  Instead 
of  there  being  any  likelihood  of  a  return  to  the  condi- 
tions of  past  production,  new  forces  are  steadily  becom- 
ing more  pronounced,  the  nature  and  effects  of  which 
admit  of  easy  analysis  and  prediction. 

The  adherence  to  the  old  theory  of  value  is  not  to  be 
accounted  for  by  its  harmony  with  the  facts  of  to-day, 
but  rather  by  the  incapacity  of  men  to  conceive  any 
other  adequate  theory.  It  can  be  seen  how  costs  stop 
the  fall  in  value,  and  also  how  the  competition  of  pro- 
ducers lowers  prices  ;  but  it  is  not  realized  how  other 
forces  may  bring  about  the  same  result.  A  new 
theory  of  prices  must  show  a  force  that  lowers  and  an- 
other that  sustains  them.  Can  such  forces  be  found 
which,  in  scope  of  operations,  shall  be  general  and 
adequate,  and  at  the  same  time  in  tendencies  and  results 
shall  harmonize  with  the  known  facts  about  industry  ? 
A  reply  to  these  questions  is  possible,  or  at  least  can 


v»U. 


60  The  Theory  of  Prosperity 

be  attempted  with  some  hope  of  success,  if  the  point 
of  view  is  shifted  from  that  of  the  producer  to  that 
of  the  consumer. 

The  old  theory  assumes  a  passive  consumer  wanting 
certain  goods  supplied  by  a  given  group  of  producers. 
If  prices  tend  to  fall  through  the  action  of  producers, 
consumers  gain  nothing  by  activity ;  all  the  benefits  of 
improved  production  come  to  them  through  no  effort 
of  their  own.  But  if  the  motives  of  producers  do 
not  lead  them  to  compete  with  one  another  by  lowering 
prices,  have  the  consumers  any  remedy  ?  Yes,  through 
the  power  of  substitution.  The  consumer  has  innu- 
merable wants,  many  of  which  have  about  the  same 
intensity.  Any  upward  movement  in  the  price  of  a 
particular  good  is  met  by  the  shifting  of  the  consump- 
tion to  other  goods  supplying  the  same  want,  or  by 
the  development  of  new  wants  demanding  other  goods 
for  their  satisfaction.  If  the  price  of  beef  rises,  the 
consumer  may  eat  more  mutton  and  pork,  or  he  may 
forego  meat  entirely  and  eat  more  bread  and  vegetables. 
If  cotton  goods  rise,  more  woollens  are  bought ;  if  coal 
oil  becomes  costly,  people  use  gas  and  electricity ;  if 
lumber  becomes  expensive,  builders  resort  to  brick  and 
iron.  The  consumer  finds  substitutes  to  which  he  may 
turn  when  the  producer  seeks  to  take  an  advantage  of 
him. 

There  is  thus  exerted  on  prices  a  steady  downward 
pressure  which  producers  cannot  counteract.  Even 
powerful  trusts,  finding  their  monopoly  curtailed  by  the 
consumers'  power  of  substitution,  must  be  active  in 
watching  the  action  of  consumers,  or  a  large  part  of 
their  trade  and  profits  disappears.  The  force  that 


Monopoly  Advantage  61 

lowers  prices  lies  in  the  consumer.  It  is  his  power  of 
substitution  that  fixes  the  lower  limit  of  price.  If  the 
consumer  has  no  power  of  substitution,  prices  will  be 
high  no  matter  how  low  costs  are,  and  they  will  move 
up  until  the  power  of  substitution  becomes  effective. 
Instances  of  this  were  apparent,  even  at  the  time  of 
the  classical  economists.  The  price  of  food  was  high 
in  England  for  the  century  from  1770  to  1870.  Con- 
sumers could  not,  under  the  prevailing  conditions, 
secure  a  fitting  substitute  for  wheat  bread.  Not  until 
after  1870  did  foreign  commerce  furnish  substitutes  for 
the  traditional  food  in  sufficient  quantities  to  create 
an  effective  option.  Then  all  prices  of  food  fell  and  a 
lower  normal  level  was  secured  through  the  increased 
power  of  substitution.  With  a  multitude  of  new  ar- 
ticles of  food  pouring  into  the  English  market,  no  one 
kind  can  be  raised  in  price  without  a  change  of  con- 
sumption to  other  foods. 

It  is  this  power  that  protects  the  consumer,  and  not 
the  rivalry  among  producers.  The  price  of  meat  is 
lowered,  not  by  competition  of  producers,  but  by  the 
cheapness  of  its  substitutes.  In  so  far  as  producers 
compete,  it  is  a  competition  between  the  producers  of 
different  articles  capable  of  supplying  the  same  want. 

The  consumers'  power  of  choice  makes  this  competition 

. 
effective.     There  is  no  force  operating  entirely  in  one    \ 

group  of  producers  to  bring  this  result  to  a  passive 
consumer.  Unless  he  is  active,  high  prices  are  forced 
upon  him  by  those  upon  whom  he  has  become  accus- 
tomed to  depend. 

In  the  consumer  also  lies  the  ultimate  cause  of  rising 
prices.  Wants  are  multiplying  more  rapidly  than  the 


62  The  Theory  of  Prosperity 

power  to  supply  them,  and  each  step  in  the  advance 
of  civilization  increases  the  number  of  wants  and  the 
intensity  of  their  satisfaction.  The  consumer  is  forced 
to  leave  unsatisfied  the  least  urgent  of  his  older  wants 
in  order  to  secure  a  more  complete  satisfaction  of  newer 
wants.  With  each  of  the  older  wants  the  marginal 
gratification  is  foregone,  so  that  the  income  employed 
in  purchasing  the  goods  that  satisfy  them  may  be  used 
'  in  some  new  direction.  The  margin  of  consumption  rises 
j  as  a  result,  and  thus  the  value  of  all  goods  is  forced  up. 
Against  this  change  the  consumer  has  no  protection, 
for  he  must  seek  the  greatest  satisfaction,  and  this  is 
obtained,  in  spite  of  the  rise  of  values,  in  the  gratification 
of  the  newer  and  intenser  wants.  Higher  values  form 
a  necessary  reduction  in  his  welfare  as  a  consumer,  but 
this  reduction  is  more  than  compensated  for  by  the 
greater  satisfaction  of  the  new  life.  Total  utilities 
increase  and  total  values  increase  with  them ;  the  only 
reduction  is  in  the  consumer's  surplus.  To  recover 
this  loss  the  individual  consumer  must  improve  his 
position  as  a  producer.  This  he  can  do  by  changing 
his  production  from  the  older  articles  giving  less  in- 
tense satisfaction  to  the  newer  and  more  urgently 
demanded  goods.  Capital  is  withdrawn  from  marginal 
production  and  employed  in  making  goods  giving  more 
satisfaction.  The  return  on  capital  and  the  rate  of 
wages  are  thus  increased,  while  the  pressure  of  more 
urgent  wants  compels  men  to  forego  the  gratifica- 
tion of  the  less  intense  wants  at  their  former  margin 
of  consumption. 

Active  producers  thus  get  a  reward  more  than  recoup- 
.  ing  them  for  the  higher  prices  they  pay  as  consumers. 


Monopoly  Advantage 


The  tendencies  of  active  producers  and  active  consumers 
harmonize.  They  both  avoid  the  old  marginal  goods, 
and  get  as  a  result  a  higher  reward  and  an  intenser 
satisfaction.  Only  the  sluggish  producers  continue 
selling  the  older  articles  at  a  lower  price.  In  the  end 
they  also  see  the  uselessness  of  this  endeavor  and 
adjust  themselves  to  the  new  situation.  The  steady 
pressure  on  producers  does  not  lead  them  to  stick  by 
old  forms  of  production  through  a  lowering  of  price. 
On  the  contrary,  their  dominant  motives  pull  them 
away  from  competition  into  the  production  of  new 
articles  for  which  the  demand  is  more  urgent.  This 
withdrawal  of  the  more  active  producers  into  new  forms 
of  industry  creates  a  new  equilibrium. 

Capital  and  labor  can  be  put  to  better  uses  with 
every  improvement  in  the  variety,  harmony  and  inten- 
sity of  consumption.  Direct  competition  at  the  margin 
of  production  is  thus  avoided.  Although  the  total  pro- 
duction of  goods  is  increased,  the  reduced  supply  of 
each  good  causes  values  to  rise,  so  that  the  position  of_ 
all  producers  is  improved.  The  dominant  motives 
among  producers  lead  to  withdrawal  from  competition, 
and  not  to  an  increase  in  its  intensity.  There  is,  there- 
fore, no  enduring  tendency  forcing  values  down  to  costs. ; 
On  the  contrary,  values  move  away  from  costs,  and  in 
a  progressive  society  continue  to  rise  in  spite  of  the 
decline  in  costs.  Downward  movements  in  price  come 
through  an  increased  power  of  substitution  affecting 
particular  articles,  and  upward  movements  come  through 
the  increased  intensity  of  particular  wants.  Every 
change  in  price  depends  on  some  alteration  in  the 
relative  strength  of  these  two  forces.  Costs  lose  their 


•re* 


..  v<v   »—*,-».- 


<•>•-«*•• 


64 


The   Theory  of  Prosperity 


power  to  fix  prices  with  the  increase  of  industrial 
efficiency. 

Because  of  the  confusion  existing  in  the  use  of  terms, 
the  elements  that  enter  into  price  have  not  been  dis- 
tinguished from  those  that  influence  value.  To  get 
simplicity  and  stability  of  conditions,  the  elements  of 
price  that  are  peculiar  to  markets  have  been  eliminated 
as  transient,  leaving  as  the  enduring  elements  only  the 
subjective  influences  that  determine  value.  Cost  and 
sacrifice,  therefore,  seem  to  be  the  sole  elements  in 
i  normal  price. 

For  an  isolated  producer  this  analysis  is  correct,  but 
he  would  have  no  price  problem.  All  his  relations 
would  be  with  some  local  situation.  He  would  work  so 
long  as  the  costs  and  sacrifices  of  this  direct  contact 
with  nature  were  less  than  the  utility  of  the  goods  re- 
ceived in  return.  These  costs  and  sacrifices  determining 
subjective  value  help  also  to  fix  market  price,  but  prices 
in  a  market  have  some  elements  that  do  not  enter  into  a 
Crusoe  world.  As  soon  as  exchanges  permit  the  rise 
of  social  relations,  the  relative  advantages  of  different 
locations  and  occupations  have  an  influence  on  pro- 
ducers. Each  worker  must  be  paid  for  his  labor  the 
price  that  the  best  of  his  options  to  work  will  give.  If 
he  can  work  in  Vermont  or  Iowa,  if  he  can  raise  corn 
or  wheat,  if  he  can  be  a  farmer  or  a  mechanic,  he  has 
an  option  of  place,  product,  or  calling  that  will  increase 
his  wages  above  the  return  he  would  get  as  an  isolated 
producer  in  some  local  situation. 

Differential  costs  are  also  unknown  to  isolated  pro- 
ducers. If  two  farms,  one  producing  twenty  bushels 
and  the  other  twenty-five  bushels  to  the  acre,  send  their 


Monopoly  Advantage  65 

produce  to  the  same  market,  the  price  of  grain  must  be 
high  enough  to  compensate  the  workman  on  the  poorer 
land.     No  price  element  of  this  kind  would  enter  if  the 
two  farmers  were  isolated  producers.     Their  subjective 
equilibrium  would  then  have  no  elements  but  cost  and 
sacrifice.     Differential  cost  and  optional  advantage  are,  < 
therefore,  elements  in  market  price  that  are  absent  from  [ 
the  simple  relations  of  a  Crusoe  world. 


is  a  third  element  that  appears  only  in  a  market. 
The  isolated  producer  is  in  direct  contact  with  nature, 
and  bases  his  calculations  on  conditions  in  view  and 
under  control.  He  deals  with  realities,  and  thus  avoids 
the  uncertainties  of  market  relations.  As  soon  as  a 
market  is  established  a  multitude  of  uncertain  elements 
enter  the  situation,  against  which  the  producers  must 
guard  themselves  by  price  changes.  They  will  demand 
an  extra  return  equal  to  these  disadvantages.  The 
buyer  in  a  market  must,  therefore,  pay  higher  prices 
than  if  he  were  an  isolated  producer.  Expressed  in 
subjective  terms  this  means  that  those  going  to  a  market 
have  a  higher  margin  of  production  and  consumption 
than  if  they  were  isolated  producers.  If  they  consume 
more  goods  than  they  would  living  in  isolation,  it  is  due 
to  their  greater  productive  power,  which  enables  them 
to  pay  more  and  yet  have  a  greater  quantity  of  goods. 
The  supply  line  would  cross  the  demand  line  at  a  higher 
point,  but  the  demand  line  is  so  much  raised  by  the 
added  productivity  of  market  relations  that  the  new 
equilibrium  involves  a  greater  production  of  goods  than 
before. 

Cost  and  sacrifice  are  permanent  elements  running 
through   the   whole   industrial   world,    but   they  affect 


66 


The  Theory  of  Prosperity 


values  only  and  never  cause  price  movements.  Differ- 
ential cost,  optional  advantage  and  risk  may  be  greater 
or  less  and  may  affect  some  producers  more  than  others. 
They  are  the  pure  price  elements  and  the  cause  of  price 
variations.  Their  sum  is  the  sum  of  possible  price 
variations,  and  shows  the  amount  of  income  that  can  be 
transferred  by  price  movements.  When  pictured  in  a 
diagram  the  price  of  goods  in  a  market  would  have  the 
following  elements. 


FIG.  IX 


Speculation.  Speculators  differ  from  producers  in  that  they  return 
the  goods  they  buy  to  the  same  market  from  which  the 
goods  were  taken.  A  producer  buys  in  one  market  and 
sells  in  another ;  one  buying  wool  sells  cloth,  another 
buying  grain  sells  flour,  a  third  buying  leather  sells 
shoes.  Producers  not  changing  the  form  of  goods  at 
least  change  their  place  or  alter  their  time  relations. 
The  shipper  of  goods  from  regions  where  they  are 
abundant  to  places  where  they  are  rare  is  as  much 
a  producer  as  he  who  made  them.  So  is  he  who  sup- 


Monopoly  Advantage  67 

plies  the  deficit  of  one  season  out  of  the  abundance 
of  another.  But  none  of  these  useful  offices  is 
performed  by  the  speculator.  His  income  does  not 
depend  on  the  increase  of  goods  or  utilities.  The 
amount  changing  hands  through  speculation  exceeds 
the  income  of  the  speculators,  but  there  is  a  net  balance 
in  their  favor  that  comes  in  some  way  from  the  annual 
produce.  No  one  lives  and  consumes  except  as  he  has 
a  claim  on  the  product  of  industry.  And  a  share  of 
this  product  comes  to  no  one  except  by  a  movement  in 
prices.  To  this  law  speculators  are  no  exception.  They 
must  have  some  power  over  prices  or  take  advantage  of 
some  price-making  conditions. 

The  index  of  speculation  is  the  presence  of  a  margin 
between  the  buyers'  and  sellers'  price  on  the  same 
market.  The  cause  of  this  margin  is  the  instability  of 
prices  or  some  waste  of  productive  forces.  Wherever 
prices  fluctuate  the  buying  public  pays  for  the  goods  it 
takes  from  a  market  at  the  upper  limit  of  price,  while 
those  who  sell  on  the  market  only  receive  the  lower 
limit.  If  goods  are  in  danger  of  burning  or  may  be 
damaged  in  transit  from  one  market  to  another;  if 
dealers  are  dishonest  or  incompetent ;  if  war,  storm,  or 
disaster  can  hinder  the  making  or  transfer  of  goods ;  if 
laws  and  taxation  cannot  be  foreseen  ;  if  the  lives  of 
producers  are  in  danger,  or  if  the  rightful  enjoyment  of 
income  is  made  uncertain,  a  margin  in  prices  is  created 
and  a  flow  of  income  started  in  which  producers  do  not 
share.  Stable  prices  reduce  speculation,  and  turn  in 
some  other  direction  the  flow  of  the  income  due  to 
uncertainty.  It  matters  not  whether  prices  are  high 
or  low,  steady  prices  cut  in  on  the  gains  of  speculators, 


68  The  Theory  of  Prosperity 

and  with  regular  conditions  the  margin  of  price  within 
each  market  disappears. 

The  flow  of  income  due  to  instability  of  conditions 
makes  changes  in  prices  by  depressing  the  value  of 
future  goods.  Future  goods  have  a  less  value,  unit  for 
;  unit,  than  present  goods ;  and  as  they  ripen  into  present 
;  goods,  their  value  gradually  increases  until  in  the  final 
•  stage  the  difference  disappears.  The  increase  of  value 
as  the  transformation  goes  on  is  the  cause  of  the  income 
j  to  which  the  name  interest  is  given.  If  any  risk  or  un- 
'  certainty  exists  in  production,  the  value  of  future  goods 
starts  at  a  lower  point  than  it  would  if  only  interest  were 
paid.  Suppose  that  the  values  of  present  and  future 
goods  must  differ  by  twelve  per  cent  to  induce  capital- 
ists to  invest.  If  there  is  risk,  the  difference  in  value 
between  the  two  kinds  of  goods  will  be  made  greater. 
Instead  of  future  goods  starting  at  eighty-eight  per  cent 
of  the  value  of  the  present  goods  produced,  they  would 
start  at,  say,  eighty  per  cent  of  the  price  of  the  finished 
product.  If  the  timber  used  in  making  a  house  is  ten 
per  cent  less  in  value  than  the  finished  wood  in  it 
because  of  the  rate  of  interest,  it  will  start  at  eighty-five 
per  cent  of  this  final  value  if  the  danger  from  fire  is 
five  per  cent  of  the  value  of  the  house.  When  the 
price  of  steel  wares  is  uncertain,  the  material  used  in 
making  them  and  the  capital  goods  used  up  will  have 
a  lower  value  than  if  no  risk  existed.  Any  instability 
in  the  price  of  grain  or  meat  does  not  raise  the  price 
to  the  consumer  :  it  lowers  the  price  to  the  farmer.  All 
the  effect  of  insecurity  is  shown  in  the  lower  value  of 
future  goods  that  finally  ripen  into  present  goods.  This 
margin  between  raw  products  and  finished  goods  is  the 


_ 

Monopoly  Advantage  69 

~*  *~ *       >-•<-  .'    \^»  e— «»•"•»—•     •-   •    A  "~"«_.t. 

source  of  the  fund  from  which  speculators  draw  their 
income.  It  is  an  income  that  is  not  interest  or  wages, 
although  it  acts  on  prices  in  the  same  way  as  interest. 

Many  social  institutions  aim  to  eliminate  this  risk,  or 
to  prevent  the  individual  producer  from  suffering  un- 
certainty in  his  return.  Insurance  on  life  or  against  fire 
does  not  make  fire  or  death  less  frequent.  It  merely 
prevents  individuals  from  feeling  too  severely  the  bur- 
den of  these  evils.  Where  inflammable  goods  are  used, 
the  material  out  of  which  they  are  made  starts  at  a 
lower  value.  The  flow  of  income  thus  created  is  by  in- 
surance transferred  from  the  individual  owners  of  goods 
to  the  insurance  company.  A  bank  giving  security  to 
its  depositors  gets  in  return  the  income  which  otherwise 
would  go  to  the  possessors  of  money,  but  which  would 
be  of  no  importance  to  them  because  their  losses 
through  risks  would  offset  this  additional  income. 

A  railroad  company  substituting  stable  high  rates 
for  fluctuating  rates  does  not  get  the  income  of  any 
individual  using  the  road.  So  long  as  the  rates  are 
unstable,  the  prices  at  which  future  goods  started  in  the 
process  of  ripening  into  present  goods  must  be  so  low 
that  the  possible  high  rate  of  transportation  can  be  paid. 
Stable  high  rates  absorb  the  fund  that  would  in  any 
case  be  lost  to  the  public  by  this  lower  value  of  future 
goods.  So  long  as  the  rates  remain  unstable,  certain  in- 
dividuals from  time  to  time  gain  by  the  reduced  cost  of 
transportation.  But  this  is  for  them  a  specific  gain, 
in  which  the  public  does  not  share.  These  gains  re- 
semble rent  and  do  not  cause  their  possessors  to  bid 
higher  for  future  goods  and  thus  transfer  the  gain  from 
them  to  the  public.  The  initial  efforts  in  production 


7O  The  Theory  of  Prosperity 

by  which  future  goods  are  created  are  paid  no  more 
highly  if  individuals  gain  through  occasional  lower  rates 
than  if  the  railroad  company  gets  a  larger  sum  through 
stable  rates. 

When  the  methods  for  making  prices  stable  used  by 
banks,  insurance  companies,  railways,  and  industrial 
trusts  are  compared  with  those  earlier  in  vogue,  the 
difference,  it  is  seen,  does  not  consist  in  any  change  in 
the  prices  of  goods  upon  which  the  public  welfare  de- 
pends. Neither  interest  nor  wages  are  altered.  These 
corporations  get  the  margin  between  future  and  present 
goods  from  which  speculators  formerly  derived  their 
income.  A  part  of  the  public  was  interested  in  this 
margin  because  production  could  not  be  carried  on 
without  speculation.  Early  producers  trusted  to  the 
speculative  gains  connected  with  their  industry  more 
than  to  its  regular  returns.  But  this  fact  caused  many 
ill-directed  efforts  through  which  much  of  the  margin 
of  speculation  was  wasted  or  destroyed.  Where  specu- 
lation is  dominant,  little  or  no  net  gains  persist  to  im- 
prove society.  Through  the  larger  organizations  of 
the  present  time,  the  flow  of  income  caused  by  the 
margin  of  speculation  is  funded  and  becomes  a  part  of 

;  the  regular  income  of  society.  There  is  thus  a  social 
gain  quite  as  marked  as  if  some  new  invention  had  been 
introduced.  A  funded  income  saved  by  making  prices 

i> stable  is  quite  as  effective  as  an  invention  in  increasing 
the  income  available  for  steady  enjoyment.  Increased 
security  is  a  net  gain  adding  to  the  revenues  of 

[those  who  create  it  without  taking  anything  from  the 
public. 

If,  as  has  been  shown,  the  downward  movement  in 


Monopoly  Advantage  71 

prices  is  due,  not  to  the  competition  of  producers,  but  i  Competitio 
to  the  power  of  substitution  possessed  by  consumers.  ithrough, 

i  monopoly. 
if   superior    producers   withdraw  from   competition   by ' 

producing  articles  supplying  more  intense  wants,  if 
the  monopoly  powers  of  the  various  producers  differ 
radically,  the  principle  of  free  competition  seems  to  be 
set  aside.  Nevertheless,  the  assumption  of  free  compe- 
tition is  necessary,  not  to  account  for  low  prices,  but  to 
make  sure  that  the  ordinary  motives  for  production  are 
in  operation.  When  producers  are  free,  they  place 
themselves  at  those  points  where  their  efforts  create 
the  largest  product.  Natural  resources  are  thus  made 
the  best  use  of ;  each  man  finds  his  most  suitable  place 
in  the  field  of  production,  and  consumers  are  enabled 
to  satisfy  their  most  intense  wants.  The  theory  of 
competition  expresses  in  the  simplest  way  the  assump- 
tion on  which  economists  agree,  and  through  which 
intricate  discussions  of  the  motives,  differences,  and 
peculiarities  of  men  are  avoided. 

These  facts  associated  with  the  theory  of  competi- 
tion, however,  are  not  disturbed  by  causes  that  fix  the 
price  level  at  some  other  point  than  the  cost  of  produc- 
tion. The  monopolist  has  motives  similar  to  those  of 
competing  producers.  He  must  use  the  best  machinery, 
place  his  factories  in  the  most  favored  locations,  and 
see  that  his  workmen  are  placed  where  their  efforts 
are  most  effective.  A  railroad  corporation,  for  exam- 
ple, has  men  employed  in  many  different  occupations. 
The  tracks  must  be  kept  in  order ;  the  locomotives  and 
cars  must  be  repaired;  switchmen  and  traffic  agents 
must  be  employed ;  the  trains  must  be  properly 
manned ;  and  the  offices  must  be  supplied  with  clerks 


72  77/<?  Theory  of  Prosperity 

and  managers.  The  company  loses  if  the  relative 
number  of  any  of  these  groups  of  workers  is  too  large 
or  too  small.  Even  if  it  be  assumed  that  a  profit  is 
made  on  every  act  of  these  men,  a  wrong  disposition 
of  them  would  reduce  the  profit  below  the  attainable. 
There  is  a  marginal  use  of  men  in  each  group  of 
workers  —  some  employee  who  would  be  discharged  if 
the  force  were  reduced.  This  marginal  use  should 
be  the  same  in  each  kind  of  work.  The  last  track- 
hand  should  yield  the  same  net  profit  to  the  company 
as  the  last  switchman  or  the  last  clerk.  If  this  is  not 
true,  there  is  a  loss  that  could  have  been  avoided. 
There  is  thus  an  effective  competition,  but  it  is  not  a 
competition  of  men  for  places  or  of  producers  for 
cheapness,  but  of  position  with  position.  The  least 
productive  positions  are  always  on  terms  of  equality, 
and  there  is  a  shifting  of  men  from  one  to  another  as 
each  in  turn  sinks  below  or  rises  above  the  marginal 
level.  No  matter  how  close  the  monopoly  or  how  far 
above  the  lower  limit  prices  are  held,  there  is  a  com- 
petitive level  to  which  the  prices  of  marginal  products 
tend  and  by  which  all  other  prices  are  measured. 
Every  monopoly  has  some  men  employed  in  positions 
that  yield  the  same  net  return  as  do  the  exposed 
industries  with  no  monopoly.  These  marginal  posi- 
tions in  all  industries  fix  the  competitive  level  of  prices. 
If  in  any  occupation  prices  fall  below  this  level,  work- 
men will  be  withdrawn  and  put  to  work  in  positions 
where  the  marginal  level  is  higher.  The  most  efficient 
positions  are  always  occupied  whether  production  is 
monopolized  or  not.  If  there  is  any  difference,  the 
right  man  is  put  in  the  right  place,  and  the  best  loca- 


Monopoly  Advantage  73 

tions  for  an  industry  are  more  often  selected  under 
monopoly  than  under  free  competition.  The  greater 
intelligence  of  the  managers  of  monopolies  insures 
these  ends  more  fully  than  if  each  man  sought  a 
place  for  himself  and  relied  on  his  individual  efforts^ 
to  find  it.  The  errors  in  judgment  are  thus  elimi- 
nated and  a  better  guaranty  furnished  than  if  the 
forces  are  made  effective  for  which  free  competition 
is  sought.  There  is  nothing  arbitrary  about  monopoly 
or  any  natural  high  level  of  prices.  They  imply 
intenser  activity  and  more  normal  conditions  than  any 
system  of  competition  has  thus  far  furnished. 

In  his  relation  to  the  consumer  the  monopolist  must 
also  promote  the  normal  tendencies  sought  for  under 
competition.  He  loses  more  than  the  consumer  if  the 
less  intense  instead  of  the  more  intense  wants  are  sat- 
isfied. Consumers  being  under  the  influence  of  custom 
and  habit  are  apt  to  hold  to  old  forms  of  consumption 
long  after  it  is  possible  to  displace  them  by  goods  more 
suitable  for  the  desired  ends.  Every  more  intense 
want  that  the  monopolist  arouses  gives  him  a  greater 
hold  over  his  public  by  limiting  their  power  of  substi- 
tution. New  wants  demand  particular  goods  only  to 
be  had  from  the  monopoly ;  old  wants  may  be  supplied 
in  many  ways.  The  judgment  of  monopolists  is 
superior  both  to  the  producer  and  to  the  consumer.  He 
brings  in  no  new  tendency,  but  merely  realizes  more 
fully  those  ends  sought  for  under  free  competition. 
Every  one  is  brought  more  nearly  to  the  normal  line 
both  of  wants  and  activities.  The  regularity  of  life 
and  the  power  of  predicting  events  and  results  are  thus 
increased,  and  all  parts  of  society  become  more  pro- 


74 


The  Theory  of  Prosperity 


Differential 
advantage. 


gressive  than  they  would  be  if  the  conflicting  motives 
of  the  less  efficient  but  more  numerous  classes  were 
allowed  to  dominate  society.  Monopoly  is  bad,  but 
the  confusion  of  ignorance  is  worse. 

The  use  of  each  agent  in  production  is  also  competed 
for  just  as  it  would  be  under  free  competition.  Some 
of  the  articles  made  by  each  monopoly  are  sold  at  this 
price.  When  the  price  of  wheat  was  high  in  England 
many  varieties  of  farm  produce  had  their  value  at  the 
competitive  level.  Once  in  four  years  an  English 
farmer  could  get  a  paying  crop  of  wheat  from  his  land. 
In  the  meantime  root  crops  and  other  cheap  foods  were 
raised  at  an  expense  equalling  their  value.  In  all  mo- 
nopolies there  are  by-products  giving  only  ordinary  busi- 
ness returns,  and  these  fix  the  level  from  which  are 
measured  the  extraordinary  profits  obtained  from  the 
fully  monopolized  articles.  This  competitive  level  may 
be  disguised  under  peculiar  forms,  but  it  is  always  pres- 
ent to  guide  the  distribution  of  labor  and  the  selection 
of  the  more  advantageous  situations  in  which  labor  may 
be  employed.  In  periods  of  rising  prices  the  strain  of 
competition  is  as  real  as  in  periods  of  depression,  and 
more  effective,  for  the  margin  of  wants  and  the  margin 
of  efficiency  are  then  matched  more  carefully,  and  the 
normal  equilibrium  is  more  fully  attained. 

Differential  advantage  is  based  on  the  presence  in 
each  industry  of  marginal  producers  with  high  ex- 
penses. A  fall  in  price  is  checked  by  their  withdrawal. 
A  rise  in  price  is  prevented  by  their  increased  activity. 
Prices  are  thus  kept  stable  by  marginal  producers.  No 
marked  or  enduring  change  can  take  place  so  long  as 
a  number  of  them  are  present  and  active.  The  em- 


Monopoly  Advantage  75 

phasis  of  this  doctrine  is,  at  least  partly,  the  result 
of  the  social  views  and  prejudices  of  writers  who 
as  statesmen  and  reformers  desire  to  cast  imputation 
upon  particular  forms  of  income,  or  they  may  be  desir- 
ous of  defending  other  forms.  When  rent  was  proved 
to  be  a  differential,  it  was  shown  to  be  an  unearned 
income.  As  the  landlords  of  England  were  in  politi- 
cal control  of  the  nation,  their  position  could  be  more 
effectively  attacked  if  they  were  viewed  as  drones 
consuming  what  they  did  not  earn  than  if  the  political 
principles  for  which  they  stood  were  questioned.  The 
thought  of  confiscating  rent  comes  up  inevitably  as 
soon  as  rent  is  regarded  as  a  differential,  and  Henry 
George's  position  is  the  logical  outcome  of  its  emphasis. 
It  is  not  probable  that  George  would  have  magnified  its 
importance  if  he  had  not  desired  to  get  a  moral  support 
for  confiscation. 

Similar  social  influences  lie  back  of  the  more  recent 
development  of  the  doctrine.  But  it  is  the  defenders 
of  the  present  social  order  who  in  recent  times  have 
extended  the  field  and  emphasized  the  importance  of 
differential  advantage.  Senior  claimed  that  interest 
was  due  to  the  pain  of  abstinence.  When,  however, 
immense  sums  of  wealth  were  concentrated  in  the 
hands  of  a  few  persons,  reformers  asked,  How  does  a 
millionaire  suffer  to  the  amount  his  income  would  in- 
dicate ?  The  defence  is  now  shifted  by  advancing  the 
doctrine  of  differential  advantage.  Not  the  rich  man, 
it  is  said,  but  the  small  capitalist,  has  a  cost  equal  to 
his  income,  and  if  the  rate  of  interest  is  lowered,  he 
will  be  crushed  out.  The  opponent  of  interest  is  thus 
put  in  the  position  of  antagonizing  the  welfare  of  the 


76  The  Theory  of  Prosperity 

small  capitalists.  It  is  then  assumed  that  the  good  of 
the  small  holder  is  that  of  the  nation,  and  thus  the  income 
of  the  millionaire  is  justified  by  showing  that  it  comes 
from  general  conditions  upon  which  national  progress 
depends.  The  similar  justification  can  be  found  in  the 
differential  advantage  of  producers.  The  man  who 
makes  a  fortune  does  so  because  his  expenses  are  less 
than  those  of  other  producers,  and  prices  must  be  high 
enough  to  pay  their  expenses.  The  public,  therefore, 
suffer  no  loss  from  the  rapid  creation  of  wealth  by 
favored  producers.  So  long  as  the  gains  of  the  wealthy 
are  price-produced  and  not  price-producing,  it  is  held 
that  no  one  can  rightly  complain  of  their  increased 
income. 

So  both  conservatives  and  radicals  find  it  to  their 
interest  to  emphasize  differential  advantage,  and  by 
their  joint  influence  its  importance  has  been  exagger- 
ated beyond  anything  the  facts  warrant.  Their  reason- 
ing has  a  solid  basis  only  when  the  law  of  decreasing 
returns  is  in  operation.  Marginal  expenses  are  no  bar  to 
a  permanent  fall  in  prices  if  the  industry  yields  increas- 
ing returns  in  response  to  efficient  applications  of  labor 
and  capital.  The  high  marginal  expenses  of  producers 
:  under  these  conditions  result  from  their  individual  pecul- 
iarities. When  the  pressure  of  downward  prices  comes, 
they  must  improve  their  methods  of  production  or  be 
permanently  displaced.  Falling  prices  force  the  more 
efficient  producers  to  increase  their  output  in  order  to 
get  the  same  total  profit  with  a  smaller  return  on  each 
unit  of  commodity.  The  market  being  thus  supplied 
by  better  producers,  the  old  marginal  producers  are 
permanently  displaced. 


Monopoly  Advantage  77 

If  the  price  of  some  goods  is  raised,  the  consumer 
can  force  down  the  price  of  other  goods,  even  though 
they  have  a  high  marginal  expense.     When  the  goods 
of  the  first  class  rise  in  price,  they  absorb  more  of  the  ^^ 
consumer's  income  and  he  is  compelled  to  retrench  in    ' 
the  use  of  the  second  class  of  goods,  and  the  reduced 
demand   for   them    lowers  their    price   and    forces  out 
the  marginal  producers.     When,  then,  the  price  of  a  u<  c 

given  article  falls  because  some  other  article  or  articles    * 

l***~*~^-~*/' 
have  risen  in  price,  three  causes  operate  to  produce  a 

lower  permanent  price:  the  marginal  producers  seek 
to  improve  their  methods  of  production ;  the  more  effi- 
cient intermarginal  producers  seek  to  increase  their  pro- 
duction so  as  to  restore  their  former  profits  by  larger 
sales  at  the  lower  rate  of  profit;  and  at  the  same  time 
the  consumers  check  their  use  of  it  so  as  to  have  more 
of  the  goods  which  have  gone  up  in  price.  A  cheap- 
ening article  tends  to  fall  further,  and  an  article  rising 
in  price  has  its  rise  strengthened  by  the  forces  making 
the  other  article  fall  in  price. 

The  view  that  high  marginal  expenses  check  the 
downward  movement  of  prices  has  been  acquired  in 
fields  where  the  law  of  decreasing  returns  is  in  opera- 
tion. Food  was  assumed  to  be  the  one  natural  mo* 
nopoly,  and  was  therefore  the  one  commodity  that  rose 
in  price.  As  opposed  to  it,  all  other  articles  were 
assumed  to  fall  in  price,  and  to  be  produced  at  a  lower 
rate  of  profits.  This  reasoning  fails  as  soon  as  two 
or  more  monopolies  contest  with  each  other  for  the 
monopoly  fund.  High  marginal  expenses  w7ill  protect 
a  monopoly  against  industries  under  free  competition, 
but  they  will  not  protect  one  monopoly  against  another. 


78  The  Theory  of  Prosperity 

With  the  rise  of  a  stronger  monopoly  each  weaker 
monopoly  loses  some  of  its  relative  advantage,  and  the 
price  of  its  articles  goes  down,  no  matter  what  its  mar- 
ginal expenses  of  production  are.  Some  sugar  may, 
for  example,  be  refined  at  a  high  cost,  and  yet  this 
fact  will  not  prevent  a  fall  in  the  price  of  sugar  if  its 
monopoly  advantage  is  reduced.  The  marginal  pro- 
ducers of  steel,  oil,  coal,  or  whiskey  are  equally  helpless 
against  falling  prices  caused  by  stronger  combinations. 
The  monopoly  fund  can  be  shifted  to  other  indus- 
tries in  spite  of  their  exertions  to  protect  themselves. 
So,  too,  farmers  are  helpless  against  the  stronger  mo- 
nopolies that  come  between  them  and  the  consuming 
public.  The  price  of  wheat,  corn,  cotton,  beef,  and 
pork  can  be  kept  below  its  natural  level  through  com- 
binations among  the  buyers  of  farm  produce  without 
the  marginal  producers  being  able  to  protect  them- 
selves. They  share  in  the  common  loss,  and  must  pro- 
duce below  cost  or  improve  their  methods.  Railroads 
also  cut  in  on  the  price  of  farm  produce  without  driving 
marginal  land  out  of  use.  Land  monopolists  are  safe 

I  ttS 

enough  when  their  only  relations  are  with  the  public, 
but  their  power  is  quickly  broken  when  they  contend 
with   stronger    monopolists.      There   is    no   protection 
?  \  j  against  the  grinding  force  of  a  rising  monopoly.     Mar- 
ginal expenses   are  as  frail  a  barrier  to  a  fall  in  price 
V^     as  any  other.     No  obstacle  can  prevent  a  shifting  of 
income  with  a  change  of  monopoly  power. 

It  was  long  assumed  that  the  price  of  food  was 
upheld  by  the  high  marginal  cost  of  production  on 
land.  For  over  a  century  the  price  of  food  tended  to 
rise,  and  thus  it  seemed  that  its  high  price  was  due  to 


Monopoly  Advantage  79 

marginal  expenses.  Since  1873,  however,  the  theory 
has  been  put  to  the  test.  The  price  of  food  has  fallen 
sharply,  often  to  less  than  half  its  former  amount,  and 
yet  little  or  no  land  has  gone  out  of  cultivation.  Even 
if  in  a  few  cases  land  went  out  of  use  because  of  lower 
prices,  the  area  of  this  land  was  too  small  to  restrain 
the  fall.  When  the  downward  pressure  was  felt,  it 
was  the  good  lands,  not  the  poor,  that  set  the  price. 
The  owners  of  farms  formerly  esteemed  poor  land 
were  compelled  to  accept  prices  fixed  by  the  produc- 
tive power  of  better  lands,  or  to  change  their  use  so  as 
to  avoid  the  stress  of  competition.  Mere  withdrawal 

.  v    •    .f    *-Vf' 

of  poorer  lands  was  not  enough  to  stop  the  downward t~> 
movement  of  prices  before  the  level  set  by  the  better 
land  was    reached.      The    lower   limit  of  the  price  of/%^  **" 
food  is  fixed  by  the  mass  of  better  land,  and  not  by 
the  relatively  little  poorer  land. 

The  same  fact  is  shown  in  other  industries  when  a 

A  f*~         / 
downward   tendency  in    price   sets   in.     The   marginal 

producers  are  powerless  to  stem  the  tide.  Prices  con- 
tinue to  fall  until  the  best  producers  are  so  affected 
that  they  curtail  their  output.  A  new  level  of  price 
is  thus  created  which  holds  until  the  general  con- 
ditions of  the  trade  improve.  Some  of  the  producers 
avoid  competition  by  changing  the  nature  of  their 
industry,  others  adopt  the  methods  of  their  more 
successful  rivals,  while  still  others  strive  for  new 
inventions,  or  seek  to  utilize  more  fully  the  peculiar 
advantages  of  their  locality.  In  these  and  other  ways 
the  lower  level  of  price  tends  to  become  permanent,  or 
at  least  a  higher  level  is  not  restored  until  the  old 
marginal  producers  are  out  of  the  way.  Few  indeed 


8o  The  Theory  of  Prosperity 

are  the  producers  having  protection  against  other  makers 
of  the  same  goods.  Price  fluctuations  are  frequent  and 
severe,  and  will  remain  so,  unless  a  new  cause  of  stability 
comes  from  the  consumer. 

In  primitive  times  consumers  were  compelled  to 
satisfy  each  want  in  one  way.  Food  meant  rice,  wheat, 
beef,  or  potatoes ;  clothing  was  made  of  wool,  cotton,  or 
leather,  and  other  wants  were  satisfied  in  an  equally  nar- 
row manner  by  one  group  of  producers.  An  increasing 
variety  in  consumption  breaks  up  this  power  of  par- 
ticular commodities  and  particular  producers  over  con- 
sumers. Where  wants  can  be  satisfied  in  a  number  of 
ways,  consumers  change  from  one  commodity  to  others 
if  its  relative  price  rises.  Instead  of  thinking  in  terms 
of  concrete  goods,  they  have  for  each  want  a  unit  of 
supply  made  up  of  the  various  articles  that  satisfy  it.  In 
the  unit  of  food  needed  for  a  dinner,  twenty  different 
articles  may  be  possible  ingredients ;  many  varieties  of 
clothing  will  keep  a  man  warm,  and  he  can  be  com- 
fortable in  many  different  styles  of  houses  and  in  many 
different  localities. 

Price-deter-  Among  the  various  articles  supplying  a  given  want, 
mining  ums  some  one  js  price-determining,  the  others  having  their 
price  fixed  by  it.  The  more  costly  portion  of  the  supply 
has  its  price  fixed  by  conditions  of  the  industry  that  fur- 
nishes it.  If  this  price  is  stable,  the  prices  of  all  the 
units  of  supply  are  equally  stable.  '  The  industries  that 
produce  them  are  protected  so  long  as  the  industry 
having  the  price-determining  unit  of  supply  with- 
stands the  pressure  of  price  fluctuations.  It  alone  is 
exposed  to  the  vicissitudes  of  the  market.  Industries 
are,  therefore,  protected  from  competition  or  exposed 


Monopoly  Advantage  81 

to  it,  according  as  their  products  are  price-determined 
or  price-determining.  There  can  be  only  one  exposed 
industry  among  the  group  of  industries  that  satisfy  in 
various  ways  any  given  want;  all  the  other  industries 
have  prices  higher  than  the  natural  price,  and  have 
stable  conditions  of  production  so  long  as  this  exposed 
industry  successfully  withstands  the  pressure  of  com- 
petition. 

Each  good  has  a  definite  expense  of  production  which 
is  the  same  for  all  its  units,  and  yet  it  is  one  of  a  series 
of  goods  supplying  a  single  want.  There  may  thus  be  an 
extra  profit  on  each  of  its  units,  because  some  other 
commodity  supplying  this  want  is  the  price-determining 
element  of  the  supply.  At  the  same  time,  if  all  these 
commodities  are  viewed  abstractly  as  units  of  supply 
for  a  given  want,  they  form  a  differential  with  one 
price-determining  unit.  Each  kind  of  good  has  the 
same  expense  of  production  and  yields  an  equal  profit 
on  all  its  parts,  and  yet  its  price  has  stable  conditions 
because  it  is  a  part  of  an  abstract  unit  of  supply  with 
one  price-determining  unit.  The  gain  on  each  unit  is 
thus  marginal,  if  it  is  compared  with  other  units  of  the 
same  kind,  but  differential  if  it  is  compared  with  all  the 
various  units  for  supplying  this  want.  Rent  and  profit 
are  thus  one  fund  viewed  in  different  ways.  On  the 
price-determining  commodities  with  less  stability  of 
price,  the  income  is  profits,  while  the  same  income 
becomes  rent  if  the  price  is  stable  because  price- 
determined.  There  may  be  a  marginal  rent  if  the 
income  from  a  single  commodity  is  considered  by  itself, 
but  it  becomes  a  differential  rent  if  all  the  units  of 
supply  for  a  given  want  are  taken  into  account,  Rent 


82  The  Theory  of  Prosperity 

is  profits  made  stable  through  its  relation  to  the  smaller 
profits  on  some  competing  commodity.  Profits,  on  the 
other  hand,  are  rent  made  unstable  through  the  absence 
of  a  dearer  price-determining  unit  of  supply.  These 
conditions  create  a  permanent  monopoly  fund,  the 
causes  of  which  must  be  further  analyzed. 

The  mo-  Prices  are  lowered  by  the  consumer's  power  of  sub- 

nopolyfund.  st-jtution  and  are  raised  by  the  pressure  of  new  wants. 
Of  the  total  utility  of  his  goods  the  consumer  must 
hand  over  the  equivalent  for  their  value  to  the  producer. 
This  value  is  determined  by  the  margin  of  consump- 
tion through  which  the  marginal  utility  of  each  good  is 
fixed.  The  difference  between  the  total  value  of  the 
goods  consumed  and  the  total  utility  is  the  only  utility 
the  consumers  get  free.  The  total  value  of  goods  is 
the  share  going  to  producers.  One  part  of  this  is  a 
compensation  for  their  costs,  and  the  other  is  the  pro- 
ducer's surplus. 

To  make  plain  its  origin  the  producer's  surplus  must 
be  divided  into  two  parts.  Some  of  it  is  due  to  fixed 
charges  that  under  existing  conditions  cannot  be  altered. 
Another  part  has  its  distribution  changed  or  partially 
changed  by  price  movements.  The  part  of  which  the 
distribution  cannot  be  altered  without  some  radical 
modification  in  the  structure  of  society  is  the  fixed 
income  of  the  different  producers.  The  other  part, 
transferred  from  one  group  of  producers  to  others  by 
changes  in  prices,  is  the  free  income.  It  goes  to  the 
producers,  not  because  they  have  productive  power,  but 
because  they  control  prices.  Some  of  the  producer's 
surplus  represents  the  advantages  resulting  from  differ- 
ential costs.  The  better  land,  the  more  efficient  em- 


Monopoly  Advantage  83 

ployers,  and  the  superior  workmen  get  a  differential 
gain  that  cannot  be  taken  from  them  by  competition. 
Payments  for  interest  represent  a  fixed  charge  not  to 
be  reduced  until  the  motives  for  saving  are  increased. 
The  standard  of  life  also  sets  a  definite  limit  to  the 
downward  movement  of  prices  long  before  the  cost  line 
is  reached.  Laborers  thus  share  in  the  surplus  along 
with  capitalists  and  the  recipients  of  differential  gains. 
These  elements  change  from  time  to  time,  but  in  a 
given  period  they  interpose  a  definite  barrier  to  down- 
ward tendencies  of  prices.  The  rise  and  fall  of  prices 
can  cause  the  free  income  to  change  hands,  but  it  can 
do  no  more.  A  reaction  toward  higher  prices  sets  in 
as  soon  as  all  the  fixed  charges  are  not  met. 

These  fixed  charges  are  compensations  for  the  imme- 
diate pains  of  producers  and  for  the  use  of  the  endur- 
ing elements  in  production.  Land  will  not  be  fully 
used,  capital  will  not  be  replaced,  nor  will  the  number 
and  energy  of  laborers  be  kept  up  unless  the  customary 
rewards  are  forthcoming.  The  compensation  for  the 
use  of  the  enduring  agents  is  the  result  of  long-standing 
forces  that  cannot  be  altered  by  the  pressure  of  falling 
prices,  but  which  make  barriers  as  stable  as  the  structure 
of  society,  and  can  be  removed  only  in  a  decadent  civ- 
ilization. In  a  society  with  an  increasing  power  of  pro- 
duction there  is  no  danger  of  their  being  reduced  in 
amount. 

While  these  fixed  charges  will  be  readily  recognized, 
the  existence  of  free  income  is  more  open  to  dispute. 
Yet  if  one  perceives  that  prices  are  always  subject  to 
change,  he  must  also  see  that  there  is  a  fund  capable  of 
being  transferred  without  any  cutting  into  the  fixed 


<~  ft.  ••#-  Wl,<       -        *-~% 


84  77/tf  Theory  of  Prosperity 

charges.  This  movable  income  is  due  to  the  fact  that 
the  normal  fixed  charges  have  not  grown  as  rapidly  as 
the  fund  of  value  they  tend  to  absorb.  The  increased 
intensity  of  wants  causes  values  to  rise.  The  standard 
of  life  and  other  social  causes  increasing  the  expenses 
of  production  may  not  rise  proportionally.  The  result 
is  a  fund  with  no  incontestable  claimant.  An  insta- 
bility results  which  shifts  the  free  income  from  one 
group  of  producers  to  others  having  stronger  temporary 
claims. 

This  instability  can  be  plainly  seen  in  recent  price 
movements.  The  price  of  food  has  steadily  declined, 
and  with  it  rents  have  fallen.  None  of  the  gains  of  the 
increased  production  have  gone  to  the  agricultural  land- 
lords. The  rate  of  interest  has  also  fallen,  causing  a 
reduction  of  the  capitalist's  share  in  each  commodity,  or 
in  the  results  of  each  day's  work.  The  rate  of  wages 
has  been  kept  down  by  the  constant  accession  of 
laborers  from  outside  regions.  There  thus  arises  a 
condition  where  none  of  the  productive  agents  whose 
use  creates  the  fixed  charges  in  industry  can  increase 
its  return  enough  to  absorb  the  whole  of  the  product. 
The  growth  of  fixed  charges  lags  behind  the  growth  of 
value.  The  lower  limit  to  prices  set  by  the  amount  of 
fixed  charges  no  longer  equals  the  maximum  limit 
to  prices  fixed  by  the  pressure  of  consumers'  wants. 
Prices,  therefore,  can  be  altered,  creating  a  free  income 
to  be  absorbed  by  those  having  the  power  to  control 
them.  This  free  income  is  a  monopoly  fund  whose 
distribution  is  fixed  when  certain  producers  have  endur- 
ing causes  giving  them  an  advantage.  In  the  following 
diagram  the  total  value  of  all  goods  on  the  market  is 


represented  by  the  area  abce,  of  which  the  area  abgh 
represents  the  fixed  charges  that  cannot  be  reached  by 
price  movements.  One  part  is  cost  which  must  go  to 
those  who  endure  them  ;  the  other  part  cannot  have  its 
destination  altered  so  long  as  the  structure  of  society 
remains  as  it  is.  This  fixed  income  includes  the  mini- 
mum wages  of  each  class,  the  interest  fund  and  a  part  of 
rent.  The  downward  movement  in  price  must  cease  so 
soon  as  the  price  of  a  commodity  will  no  more  than 
meet  them. 


Free  Income 
(The  Monopoly  Fund) 


Fixed  Income 


Costs 


There  is  a  fundamental  difference  between  the  fixed 
and  free  income,  in  that  one  has  subjective  causes  and 
belongs  to  the  consumer's  world,  while  the  other  is 
objective  and  belongs  to  the  realm  of  producers.  In 
other  words,  it  is  the  intensity  of  the  consumer's  wants 
and  his  power  of  substitution  that  determine  the 
amount  of  the  fixed  income.  The  outward  flow  of 
energy  and  the  return  flow  of  goods  necessary  to  keep 
up  this  energy  is  common  to  all  members  of  the  society. 
It  goes  to  men  not  because  they  are  producers  but 
because  they  have  certain  qualities  as  consumers. 
Fixed  income  cannot  be  divided  into  funds  and  a  law 
discovered  for  the  distribution  of  each  fund  unless  con- 
sumers are  divided  into  classes  through  race  differences. 
And  in  this  case  the  funds  have  social  causes,  and  their 


86  The  Theory  of  Prosperity 

determination  is  not  a  part  of  the  present  discussion. 
The  fixed  income  goes  to  men  in  a  homogeneous  society, 
not  because  they  are  producers,  but  because  they  have 
certain  qualities  and  standards  as  consumers.  It  is  the 
minimum  amount  needed  to  make  consumers  active 
under  existing  conditions. 

Over  the  free  income,  however,  the  consumer  has  no 
control,  and  here  the  action  of  producers  is  supreme. 
For  its  distribution  the  law  is  the  same  as  that  con- 
trolling the  price  movements.  Back  of  this  distribution 
of  the  free  income  lies  no  force  but  the  monopoly 
power  of  the  different  groups  of  producers.  Prices 
are  altered  by  limitations  of  supply,  and  these  are  due 
to  the  different  rates  of  increase  of  the  various  articles 
brought  on  the  market.  The  monopoly  power  of  each 
group  of  producers  is  thus  inverse  to  the  rate  of 
increase  of  its  products  ;  the  slower  the  rate,  the  greater 
is  the  monopoly  power.  There  are  as  many  indepen- 
dent factors  in  distribution  as  there  are  independent 
units  of  supply,  and  to  get  these  units  we  must  return  to 
the  consumer.  If  he  had  a  complete  power  of  substitu- 
tion, that  is,  if  several  commodities  could  supply  each 
want  or  if  several  groups  of  producers  could  supply  all 
his  wants,  there  would  be  no  monopoly.  If  he  had  no 
power  of  substitution,  there  being  only  one  commodity 
that  could  supply  each  want,  each  commodity  would  be 
an  independent  monopoly.  The  partial  power  of  sub- 
stitution existing  at  present  throws  into  one  group  com- 
modities that  can  be  more  or  less  completely  substituted 
for  each  other.  A  group  of  this  kind  has  a  price- 
determining  unit  of  supply  through  which  all  the  other 
units  of  supply  have  their  prices  fixed. 


J 
#"^ 

VJ»U-L    '  ..«._.«. 


n.  J     wvv.  V  .  «W«WJL  \  <X_^_»    V»U-L    '  ..«._.«.  -1       (Vta-^.  Ci  r     -7 


•  Monopoly  Advantage.  87, 

*£>.*    ^.J  ------    <w^~-.  >A-    £-fr         *»--~-    tH^L 


-*—*  V 

There  are,  then,  as  many  independent  monopolies  as  'T^-*-»» 
there  are  price-determining  units  of  supply,  and  each  of 
them  is  a  factor  in  the  distribution  of  the  free  income. 
Neither  laborers  nor  capitalists  nor  landlords  have 
common  interests  in  this  distribution.  Each  group  of 
laborers,  capitalists,  and  landlords  has  its  income  fixed  r  ^ 
by  the  monopoly  power  of  the  particular  commodities 
this  group  produces.  Wages,  profits,  and  rent  may 
therefore  be  going  up  in  one  group  and  down  in  an- 
other, with  no  relief  to  the  "injured  producers  so  long 
as  the  consumer's  power  of  substitution  is  incomplete. 
Articles  for  which  there  are  few  substitutes  are  easy 
to  monopolize.  Coal  oil  to-day  furnishes  an  example 
of  a  strict  monopoly  because  many  consumers  are  so 
situated  that  they  can  use  no  other  light.  A  century 
ago,  wheat  in  England  had  the  position  that  coal  oil 
now  holds.  Bread  being  the  standard  of  life,  a  short 
supply  of  wheat  forced  up  the  price  of  all  food  products 
and  associated  the  price  of  wheat  with  the  land  prob- 
lem. But  land  in  this  general  sense  was  a  monopoly 
only  because  the  English  people  had  so  few  substitutes 
for  wheat.  The  connection  between  the  price  of  wheat 
and  the  land  problem  was  therefore  only  temporary. 
Now  the  many  different  substitutes  make  the  interests 
of  food  producers  divergent.  Different  regions,  and 
often  different  groups  of  farmers  in  the  same  region, 
compete  with  one  another.  A  general  rise  of  land  prices 
is  no  longer  probable,  although  its  price  in  particular 
regions  may  go  up.  Land  is  broken  up  between  the 
various  monopoly  units  in  the  same  way  that  laborers 
and  employers  are.  Independent  units  of  supply  thus 
lie  at  the  basis  of  the  distribution  of  the  free  income. 


88 


The   Theory  of  Prosperity 


The  functional  distribution  that  sought  to  fix  gross  wages, 
profits,  and  interests  loses  its  importance  where  price 
movements  permit  producers  to  create  monopolies. 
Each  group  of  producers  having  one  price-determining 
unit  of  supply  obtains  a  certain  gross  income  fixed  by 
the  strength  of  its  monopoly. 

It  is  again  the  monopoly  power  of  the  various  sub- 
groups that  determines  how  much  each  of  them  gets 
of  the  gross  income  coming  to  the  whole  group.  The 
laborers  receive  more  or  less  of  it  as  their  power  of 
substitution  enables  them  to  withdraw  to  better-paid 
occupations,  or  the  lack  of  this  power  prevents  outside 
laborers  from  competing  with  them.  The  capitalists, 
landlords,  and  employers  have  their  shares  fixed  also 
by  their  power  of  substitution,  each  gaining  as  their 
own  options  increase  or  those  of  the  other  sharers 
decrease.  There  is  thus  within  each  group  a  functional 
distribution  fixing  the  amount  of  wages,  profits,  and 
rents  of  those  within  it,  but  no  general  law  determining 
the  size  of  these  funds.  Gross  wages  are  only  the  sum 
of  the  particular  wage  funds  created  by  the  indepen- 
dent units  of  supply.  Two  isolated  groups  of  laborers 
with  different  powers  of  substitution  have  less  in  com- 
mon as  income  getters  than  they  have  with  their  em- 
ployers and  other  associates  within  their  own  group. 
Their  interests  as  consumers  and  as  participants  in  the 
fixed  income  are  general,  but  not  as  contestants  for  the 
monopoly  fund. 

From  the  foregoing  it  will  be  seen  that  monopoly  is 
a  problem  not  of  values  but  of  prices  ;  it  forces  up  the 
prices  of  particular  commodities  and  lowers  those  of 
others.  There  would  be  no  gain  to  monopolists  if  the 


Monopoly  Advantage  89 

ratio  of  exchange  were  not  so  altered  that  given  quan- 
tities of  their  articles  exchanged  for  greater  quantities 
of  other  articles.  Monopoly  is  thus  a  struggle  between 
producers  wrought  out  by  price  movements.  The  gain 
of  one  group  is  a  loss  to  some  of  the  others.  To 
enlarge  Ricardo's  dictum  about  rent,  monopoly  creates 
nothing :  it  is  a  transfer,  not  an  increase  of  wealth. 
Nor  does  it  affect  consumers  except  when  they  con- 
sume  more  than  the  normal  amount  of  the  monopolized 
articles,  and  then  there  is  a  corresponding  gain  to 
consumers  using  less  than  ordinary  of  these  articles. 
A  dollar  will  buy  as  much  after  the  monopoly  is  formed 
as  before,  but  a  part  of  the  public  will  have  fewer 
dollars.  The  fall  in  price  of  the  unmonopolized  articles 
will  reduce  the  incomes  of  some  of  the  producers,  leav- 
ing them  less  money  to  spend.  There  is  thus  a  shifting* 
of  income,  but  no  change  in  consumer's  values  estimated 
in  dollars.  The  total  value  of  all  the  goods  consumed 
will  not  change  unless  the  wants  of  consumers  are 
made  more  intense  or  less  intense.  Monopoly  has  no 
influence  on  these  subjective  states  of  consumers. 
.While  it  tells  who  will  get  goods  by  having  the 
money  to  buy  them,  it  gives  no  indication  of  the  use 
to  which  these  goods  will  be  put.  Prices  settle  struggle, 
values  measure  adjustment.  Monopoly  belongs  wholly 
to  the  realm  of  struggle  ;  it  has  nothing  to  do  wi,h 
adjustment. 

Since  monopoly  is  a  phenomenon  of  price,  its  influ- 
ence can  be  traced  in  price  movements.  For  every 
upward  movement  in  price  there  must  be  in  some  other 
industry  a  corresponding  fall  in  price.  It  is  possible, 
therefore,  to  connect  the  two  and  bring  out  their  causal 


9O  The  Theory  of  Prosperity 

relations.  The  classical  illustration  of  this  connection 
is  to  be  found  in  the  relation  of  the  increased  price  of 
food  and  the  fall  in  the  rate  of  profits.  We  are  told 
profits  tend  to  a  minimum.  This  means  that  through  the 
increased  use  of  poor  land  to  feed  a  growing  population 
its  price  rose,  and  with  the  rise  the  rate  of  profits  fell. 
Food  was  higher,  commodities  were  lower  in  price,  and 
through  the  changed  relation  rents  went  up  and  profits 
fell.  Here  was  plainly  a  transfer  of  income  without  an 
increase  of  wealth. 

So    long   as   the   only  great   monopoly  was    that  of 
land,  the  effect  of  monopoly  showed  itself  mainly  in 
the    changed    relation    of    rent    and    profits.       Many 
i  theories    were     developed     showing     that    rent    must 
i  rise  and  profits  or  wages  must  fall  as  population  in- 
creased.    The  doctrines  of  Henry  George  are  an  exam- 
ple of   the  influence   of  these    theories  on  those  who 
:  believe  them  to  be  permanent  tendencies  of  an  advancing 
j  civilization.     But  the  recent  fall  in  the  price  of  food  has 
\proved  these  inductions  to  be  unwarranted.     The  high 
price  of  food  is  no  longer  the   cause   of    low  profits. 
.'Other   monopolies  than  that  of  food  have  come  in  to 
1  replace  the  traditional  monopoly  of  landlords  ;  and  their 
,'  influence   on    prices    needs    the  same    elucidation   that 
earlier  economists  gave  to  rent. 

In  the  case  of  a  food  monopoly  the  influence  on 
prices  is  easily  traced.  Food  articles  are  distinct  from 
the  freely  produced  commodities  upon  which  profits 
were  made.  Even  the  unintelligent  public  could  recog- 
nize the  change  in  prices.  The  influence  of  monopoly 
is  now  quite  as  marked,  but  it  shows  itself  in  less  simple 
forms.  Production  is  more  complicated,  and  goods  pass 


Monopoly  Advantage  91 

through  many  more  hands  before  they  reach  the  con- 
sumer. Monopoly  changes  the  relation  between  those 
producers  whose  efforts  are  needed  to  put  a  single 
product  in  its  final  form.  In  making  canned  fruits  the 
price  of  tin  for  the  cans,  of  sugar  for  sweetening,  of 
the  land  on  which  the  fruit  is  raised,  and  of  the  machin- 
ery and  capital  of  the  maker,  all  enter  with  the  price  of 
labor  as  factors  in  the  final  price  of  goods.  If  the  con- 
sumer's power  of  substitution  prevents  a  rise  in  the 
price  of  canned  fruit,  a  rise  in  the  price  of  tin  or  sugar 
must  be  accompanied  by  a  fall  in  wages,  in  the 
producer's  profits,  or  in  the  rent  of  land.  There  will 
always  be  a  struggle  between  these  five  elements,  the 
stronger  for  the  moment  gaining  at  the  expense  of  the 
weaker. 

In  the  production  of  machinery  also  the  same  strug- 
gle is  apparent.  Some  parts  of  the  machine  may  be 
made  of  brass,  others  of  fine  steel,  of  nickel,  of  cast 
iron,  or  of  wood.  The  proceeds  from  the  sale  of  the 
finished  product  must  be  divided  into  these  parts,  and 
those  having  the  greater  monopoly  power  will  gain  an 
advantage.  Many  articles  are  more  complex  in  their 
production,  and  about  them  the  struggle  for  monopoly  is 
even  more  marked.  The  greater  the  complexity  of  the 
goods,  the  sharper  is  the  contest  among  those  who  must 
share  in  the  final  proceeds  of  the  joint  industry. 

A  clear  example  of  these  tendencies  is  furnished  by 
railroads.  They  must  buy  a  thousand  different  articles, 
all  of  which  are  used  up  in  creating  the  large  service 
the  corporation  performs  for  the  public.  When  some 
of  these  rise  in  price  others  must  go  down,  unless  in  the 
meantime  the  monopoly  power  of  the  railroad  over 


92  The   Theory  of  Prosperity 

rates  has  increased.  Usually  the  corporation  must 
make  economies  in  one  direction  to  compensate  for 
losses  in  another.  It  stands  opposed  to  a  thousand 
independent  producers,  each  striving  to  increase  his 
monopoly  power  but  each  losing  to  the  degree  that 
others  succeed.  The  rise  in  the  price  of  steel  rails,  tin, 
copper,  leather,  wool,  or  machinery  secures  to  particular 
producers  an  advantage  which  some  other  group  of  pro- 
ducers must  pay  for  in  the  lowered  prices  of  their  com- 
modities. The  corporation  is  merely  an  adjuster  of  the 
effects  of  their  struggle.  It  cannot  increase  or  decrease 
the  total  amount  of  its  expenditures  except  as  its  rela- 
tion to  the  public  is  altered,  and  this  relation  is  deter- 
mined by  considerations  with  which  the  struggle  between 
those  from  whom  it  buys  has  little  to  do. 

The  growth  of  one  monopoly  is  always  at  the  expense 
>of  other  monopolies,  never  at  the  expense  of  the  public. 
!  But  this  is  not  to  be  interpreted  as  meaning  that  those 
I  who  regard  themselves  as  a  part  of  the  public  never 
|  lose  by  the  growth  of   monopoly  power  in   some   new 
!  direction.       Farmers,   for    example,   get    their   incomes 
partly  from  the  land  and  partly  from  their  labor.     As 
owners  of  the  land  they  are  monopolists,  and  may  lose 
as  landlords  in  the  reduction  of  the  price  of  land.     The 
falling  price  in  food  has  been  a  cause  of  the  growth  of 
monopoly  power  in  other  directions.     Had  the  price  of 
food  remained  high,  the  industrial  trusts  would  have  met 
obstacles  to  the  rise  in  their  prices  that  could  not  have 
been  overcome,  or  at  least  not  as  fully  as  they  have  been. 
Food  has  a  first  claim  on  income;  a  shortage  in  its  sup- 
ply affects  immediately  the  prices  that  trusts  may  set  for 
their  products. 


Monopoly  Advantage  93 

A  part  of  the  losses  following  the  recent  development 
of  trusts  has  fallen  on  the  farmers,  because  the  falling 
price  of  food  has  affected  their  monopoly  as  landlords. 
Another  great  loss  has  been  felt  by  the  capitalists 
through  the  fall  of  interest.  A  large  fund  was  in  these 
ways  set  loose,  in  the  absorption  of  which  other  mo- 
nopolies grew.  They  will  grow  still  further,  when  other 
special  monopolies  lose  their  present  power.  The  rail- 
roads for  a  long  time  had  a  monopoly  power  at  the  ex- 
pense of  farmers.  The  present  valuation  of  railroad 
securities  could  not  have  been  reached  if  the  falling 
price  of  food  had  not  enabled  them  to  raise  their 
rates  relatively  to  other  prices.  The  public  had  no 
option  but  to  use  the  railroads  and  to  send  their 
goods  to  European  markets.  At  the  present  time, 
however,  the  power  of  substitution  of  shippers  is 
steadily  increasing.  Southern  markets  are  opening 
up,  and  new  water  routes  will  soon  be  able,  by  cutting 
under  railroad  rates,  to  reduce  them  to  a  minimum. 
The  monopoly  power  of  railroads  seems,  therefore,  to 
have  reached  its  maximum.  Between  the  industrial 
trusts  and  the  railroads,  the  former  have  an  increas- 
ing advantage.  The  railroads  cannot  raise  rates  in 
face  of  an  increasing  power  of  substitution  on  the  part 
of  shippers.  This  means  declining  values  for  railroad 
securities,  especially  in  places  where  the  gross  traffic  is 
likely  to  fall  off  because  of  a  change  of  the  direction  of 
commerce. 

Thus  monopoly  will  struggle  with  monopoly.  New 
ones  will  displace  the  old,  and  probably  with  an  increas- 
ing rapidity.  The  monopoly  of  agricultural  landlords 
continued  over  a  century  ;  but  it  fell  at  last,  and  so  will 


94  The  Theory  of  Prosperity 

other  monopolies,  of  which  much  is  heard.  A  substitute 
will  be  found  for  coal  oil  as  one  was  found  for  wheat. 
The  place  where  the  consumer's  power  of  substitution 
fails  is  constantly  shifting,  and  as  it  shifts,  new  monopo- 
lies will  spring  up  and  old  ones  cease  to  exist.  The 
monopoly  fund  at  a  given  time  is  definite.  More  than 
this  monopolists  cannot  get ;  less  than  this  the  public 
will  not  lose  until  the  standard  of  life  and  social  institu- 
tions are  so  changed  as  to  permit  the  public  to  absorb  a 
larger  part  of  the  gross  income  of  society. 

The  burden  of  monopoly  thus  falls  on  other  monopo- 
lists. Only  those  who  have  had  some  special  ad- 
vantage lose  through  others  securing  a  still  greater 
advantage.  It  is  not  a  matter  of  indifference  who 
has  superior  advantages.  Some  monopolies  are  more 
diffused  than  others.  The  rent  of  land  held  by  small 
farmers  and  the  gains  of  trades-unions  improve  the 
condition  of  large  numbers  of  people,  and  yet  these 
gains  are  not  different  in  kind  from  those  of  other 
monopolies.  Monopoly  power  may  be  rightly  used  or 
wrongly  used,  but  it  is  still  monopoly  power,  and  is  a 
pressure  that  takes  from  others  who  have  an  advantage, 
but  not  so  great  an  advantage  as  those  who  profit  by 
it.  The  public  gains  not  through  modifications  in  the 
process  of  struggle,  but  in  that  of  adjustment  to  nature. 
The  more  perfect  the  adjustment,  the  less  are  the  net 
proceeds  to  be  distributed  by  struggle. 


CHAPTER   III 

INVESTMENTS 

PRODUCTION  is  the  act  of  putting  things  in  motion.  Surplus 
There  is  no  productive  process  that  is  not  resolvable  value- 
into  labor;  and  viewed  from  the  standpoint  of  time, 
nothing  is  seen  but  a  series  of  efforts.  Go  into  any 
factory,  watch  any  transformation  of  goods  or  examine 
into  their  movement  from  market  to  market,  and  noth- 
ing else  appears.  Labor  is  the  expenditure  of  energy, 
resulting  in  the  movement  or  the  transformation  of 
goods.  The  man  who  writes  a  check  or  sends  a  tele- 
gram labors  as  well  as  he  who  follows  a  plough  or  tends 
a  loom.  His  energy  puts  objects  in  motion,  and  thus 
helps  to  create  utility  and  value.  It  is  this  expenditure 
of  energy  in  all  its  forms  that  constitutes  labor  and 
makes  up  the  whole  visible  process  of  production. 
Pain  is  an  incident  to  production,  not  its  measure  or 
cause.  Were  all  activity  pleasurable,  it  would  still 
be  work  when  it  moved  or  transformed  goods  so  as 
to  increase  their  utility  and  value. 

All  production  being  work  and  nothing  being  pro- 
duction but  work,  it  would  be  natural  to  expect  that 
work  and  value  should  correspond.  Ten  units  of  labor 
would  then  create  ten  units  of  value.  Many  theories  of 
production  are  based  on  the  fairness  of  this  relation. 
If  total  values  exceed  the  total  amount  of  work,  the 
laborer,  it  is  claimed,  is  exploited  and  can  demand 

95 


96  TJie   Theory  of  Prosperity 

changes  to  remedy  the  evil.  Surplus  value  to  many  is 
the  one  evil  that  crushes  the  laboring  class. 

It  is  usually  said  in  explanation  of  the  capitalist's 
activity  that  he  furnishes  the  tools,  building,  and  ma- 
terial which  the  workman  transforms  into  finished  prod- 
ucts, and  for  the  use  of  these  goods  he  receives  a 
return  in  the  form  of  interest.  This  explanation  is  only 
partial.  The  tools,  building,  and  material  were  the 
result  of  activity,  and  can  be  resolved  back  into  the 
labor  by  which  they  were  created.  The  end  of  labor  is 
goods  to  consume.  The  means  of  getting  them  is  the 
expenditure  of  energy.  Buildings,  tools,  and  material 
are  but  partially  made  consumption  goods  into  which 
they  are  gradually  being  transformed.  Ploughs,  harvest- 
ers, grist  mills,  and  ovens  are  but  partially  made  bread. 
There  are  only  two  clearly  denned  standpoints  from 
which  to  view  production  —  either  in  terms  of  energy 
expended  or  utilities  produced.  Capital  must  be  viewed 
as  an  aid  to  the  consumer  in  getting  utility,  or  to  the 
producer  in  expending  energy.  There  is  no  third 
category. 

From  the  standpoint  of  the  consumer,  everything  is 
goods.  Consumption  goods  are  those  capable  of  giving 
direct  satisfaction.  Production  goods  do  not  create  this 
satisfaction.  They  are  of  use  in  further  production,  or 

I  are  partially  made  consumption  goods.  Everything 
gets  its  value  from  the  final  consumption  good  into 
which  it  is  transformed.  The  value  of  production  goods 
cannot  exceed  the  utility  of  the  consumption  goods 
imade  from  them.  They  do,  however,  fall  short  of  this 
value  by  the  amount  of  the  interest  fund,  and  thus  sur- 
plus value  appears.  These  production  goods  are  often 


Investments 


97 


called  future  goods  because  they  are  aids  to  future  en-t 
joyment.       Consumption    goods  are  present  goods  be« 
cause  they  yield  immediate  pleasure.     Future  pleasures, 
are  not   so    highly  esteemed,  unit  for  unit,  as  present 
pleasures,  and  hence  future  and  present  goods  will  not , 
exchange  on  a  par.     The  holder  of  future  goods  makes, 
a  gain  through  the  steady  transformation  of  his  goodsj 
into    present   goods.      He  is  always   exchanging  over-.* 
valued   present   goods   for    undervalued  future   goods. \ 
The  sum  of  these  gains  is  the  interest  fund.     It  is  a 
phenomenon  of  exchange,  not  of  production.     The  use  ; 
of  capital  demands  no  new  form  of  labor ;  it  augments 
the  utility  of  what  is  made. 

If  it  is  desired  to  view  capital  from  the  standpoint  of 
production,  it  is  necessary  to  think  of  it  in  terms  of 
labor  and  expenditure  of  energy.  The  use  of  capital 
means  the  employment  of  laborers  in  a  series,  and  this 
makes  what  has  been  called  roundabout  production. 
The  material  to  be  transformed  into  goods  passes 
through  the  hands  of  many  persons,  each  of  whom  does 
something  that  helps  the  goods  to  attain  their  final  form. 
This  series  of  laborers  must  all  be  paid  out  of  the  final 
product,  and  some  rule  for  its  distribution  must  be 
agreed  upon.  If  they  all  share  alike,  every  one  would 
want  to  do  the  last  day's  work  by  which  the  article 
assumes  its  final  form.  No  one  is  willing  to  plough  the 
land,  wait  for  a  year,  and  then  share  equally  with  the 
man  who  baked  a  loaf  of  bread  made  from  the  produce 
of  this  land.  For  each  unit  of  labor  expended  on  the 
land,  a  larger  share  of  the  bread  must  be  given  than  for 
units  of  work  expended  on  the  bread.  For  each  day's 
work,  the  ploughmen  would  get,  say,  one  hundred  units 


98 


The  Theory  of  Prosperity 


of  the  final  product,  the  harvester  of  the  grain,  ninety- 
nine  units,  the  miller,  ninety-eight  units,  and  the  baker 
ninety-seven  units.  In  order  that  this  may  be  done,  the 
value  of  the  bread  must  be  greater  than  the  value  of  the 
labor  at  the  time  it  was  performed.  If  the  present  value 
of  a  day's  labor  is  ninety-seven  cents,  bread  made  by 
four  days'  labor  (one  each  of  the  ploughman,  harvester, 
miller,  and  baker)  would  have  when  made  a  value  of 
three  hundred  ninety-four  cents.  The  value  of  the 
labor  when  exerted  is  three  hundred  eighty-eight  cents. 
There  is  thus  a  surplus  value  of  six  cents  above  the 
price  of  the  labor.  In  all  cases  of  serial  labor  a  similar 
surplus  appears.  Finished  goods  are  esteemed  more 
highly  than  the  labor  by  which  they  are  made. 

To  say  that  future  goods  do  not  exchange  on  even 
terms  with  present  goods  is  the  same  as  saying  that  the 
first  laborer  in  a  series  receives  more  of  the  final  prod- 
uct than  the  last  laborer  gets  for  the  same  effort. 
Either  view  shows  the  presence  of  surplus  value,  and 
raises  the  question  as  to  its  cause.  The  explanation  is 
the  theory  of  interest. 

But  in  the  explanation  the  causes  that  are  a  part  of 
existing  conditions  must  be  separated  from  those  due 
to  heredity.  Bohm-Bawerk  has  advanced  a  theory  of 
interest  that  throws  the  emphasis  on  race  differences. 
He  enumerates  three  causes  for  the  underestimation 
of  future  goods : 1  the  incompleteness  of  the  imagi- 
nation men  form  of  their  future  wants,  defects  of 
will  by  which  wrong  choices  are  made,  and  the  short- 
ness and  uncertainty  of  life.  So  long  as  these  defects 
exist,  society  is  divided  into  two  parts.  Those  with  a 

1  The  Positive  Theory  of  Capital,  p.  264. 


Investments  99 

favorable  heredity  esteem  future  goods  more  highly 
than  those  less  developed  psychically.  This  second 
class  produce  future  goods  in  too  large  quantities, 
and  hence  depress  their  value  below  that  of  pres- 
ent goods.  Defective  heredity  thus  gives  a  monopoly 
value  to  present  goods  of  which  advantage  can  be  taken 
by  those  whose  mental  traits  or  social  position  favor  the 
accumulation  of  wealth.  Where  these  race  differences 
exist,  one  part  of  society  becomes  capitalists,  and  the 
other  remains  mere  workers.  There  is  a  flow  of  income 
from  the  latter  to  the  former,  which  is  the  interest  fund 
viewed  as  a  race  problem.  Should  the  race  be  unified, 
and  these  defects  be  removed  through  mental  develop- 
ment, interest  would  vanish  unless  it  has  a  cause  in 

J  *J       *-"«»-»-• 

existing  conditions.  Interest  paying  is  a  burden  to 
those  whose  way  to  better  methods  of  production  is 
blocked  by  their  mental  defects  and  social  position*,.  .«•  *• 
As  an  economic  problem,  however,  it  is  a  part  of  a 
scheme  of  cooperation  to  which  equals  resort.  The 
payer  of  interest  has  a  compensation  which  recoups 
him  for  the  loss. 

The  increased  quantity  of  any  article  gives  decreas-  The  cause 
ing  pleasure  in  its  use.  From  this  the  inference  is  ofinterest- 
naturally  drawn  that  the  possession  of  greater  quanti- 
ties of  goods  leads  to  a  reduction  in  their  value.  The 
marginal  utility,  it  is  said,  falls  off  with  the  increase  of 
supply,  and  the  value  must  sink  with  it.  This  result 
would  follow  if  it  were  not  for  the  increased  variety  of 
consumption.  A  greater  total  quantity  of  goods  may 
1)e  coincident  with  greater  values,  if  the  number  of  the 
goods  used  increases  more  rapidly  than  the  quantity. 
In  this  case  the  marginal  utility  will  be  higher,  less 


ioo  The  Theory  of  Prosperity 

being  used  of  each  article.  A  rising  margin  of  con- 
sumption is  a  sure  index  of  progress,  and  shows  that 
the  variety  of  wants  is  growing  more  rapidly  than  the 
total  means  of  satisfying  them. 

This  effect  of  an  expanding  consumption  is  reenforced 
by  the  enlargement  of  the  complements  of  goods  neces- 
sary for  their  full  enjoyment.  Some  articles  giving 
little  pleasure  by  themselves  are  intensely  enjoyable 
when  they  come  as  a  supplement  to  other  articles. 
Cake,  though  wanted  by  no  one  as  a  chief  article  of 
diet,  gives  great  pleasure  as  a  dessert.  Oil  and  vinegar 
bring  into  demand  many  a  vegetable  otherwise  inedible. 
Wine  often  makes  all  the  difference  between  a  good 
and  a  bad  dinner,  and  a  good  cigar  at  the  end  may 
atone  for  the  sins  of  the  cook.  Beautiful  dishes  or 
flowers  increase  the  enjoyment  of  the  banquet  table. 
Furniture,  besides  being  necessary,  may  add  to  the  charm 
of  a  house.  These  examples  of  complementary  goods 
are  not  isolated  exceptions.  Not  even  the  simplest  pleas- 
ure is  free  from  them. 

This  principle  modifies  the  conclusion  naturally  made 
about  the  fall  of  marginal  utility  with  the  increase  of 
goods.  The  civilized  man  uses  more  goods  than  his 
primitive  ancestor,  but  he  uses  a  smaller  amount  to 
satisfy  any  particular  want,  or  if  he  uses  a  like  or  larger 
amount  the  good  satisfies  other  wants.  Men  thus  value 
additional  quantities  of  goods  more  highly  than  they 
value  the  goods  they  have.  If  50  units  of  goods  con- 
sumed daily  produce  a  given  quantity  of  pleasure,  and 
55  units  enable  the  user  to  put  his  goods  into  better 
complements,  he  values  the  additional  5  units  at  a 
higher  rate  than  those  he  possesses.  He  will  impute 


Investments  101 

to  them  all  the  difference  between  the  pleasure  of  the 
50  units  in  their  present  combination  and  the  55  units 
in  their  better  complementary  relation. 

The  advantage  of  increased  variety  in  consumption  is 
shown  in  the  following  table,  where  a,  bt  c,  etc.,  repre- 
sent the  different  articles  in  use. 

Units  of      Units  of 
commodity     utility 

I4a+iol>  +  8c=                               32  =  32 

I2a+    9£  +  7<r  +  5</=                     33  =  35 

li  a  +    8l>  +  6c  +  i,d  +  $e=            34  =  38 

6/=  35  =  41 


In  the  first  case  32  increments  of  commodity  are 
assumed  to  produce  32  units  of  utility  ;  in  the  second  33 
units  of  commodity  produce  35  units  of  utility;  in  the 
third  34  units  of  commodity  produce  38  units  of  utility, 
and  in  the  fourth  35  units  of  commodity  produce  41 
units  of  utility.  In  each  of  these  cases  an  additional 
increment  of  goods  allows  the  consumer  so  to  rearrange 
his  consumption  that  3  units  of  utility  are  added  to  his 
pleasure.  He  would,  therefore,  be  willing  to  pay  three 
times  as  much  for  his  last  unit  as  he  pays  for  the  other 
units  if  they  are  to  be  consumed  without  it.  If  two 
men,  each  having  32  increments  of  commodity,  meet  for 
the  exchange  of  goods,  each  of  them  would  be  willing 
to  give  the  other  the  equivalent  of  three  units  of  pleas- 
ure to  get  from  him  the  additional  increment  needed  to 
enlarge  his  complement  of  goods  so  that  his  consumption 
would  come  under  the  second  case.  The  same  motives 
would  prompt  a  similar  bid  if  two  men  in  any  of  the 
other  classes  met  to  exchange  goods.  The  man  with 
the  larger  consumption  would  have  a  better  complement 
of  goods,  and  could  afford  to  bid  three  units  of  utility  to 


>4    v       \       a    v     *,    £->         ^  . 

\^  \ 

I O2  77^  Theory  of  Prosperity 

be  changed  from  one  class  to  another.  There  is  always 
a  pressure  on  a  man  to  consume  more  than  his  share  or 
his  income  so  as  to  enjoy  the  effect  of  the  enlargement 
of  his  complementary  consumption.  Each  increase  in 
the  amount  of  his  goods  gives  a  still  greater  increase  in 
the  amount  of  his  pleasure.  Consumers  want  to  use 
more  than  they  have,  and  make  higher  bids  per  unit 
of  goods  to  get  them.  The  greater  the  quantity  of  the 
goods  the  greater  is  their  value  per  unit.  A  surplus 
value  is  thus  created  by  changes  from  a  smaller  con- 
sumption of  units  of  goods  to  a  larger  and  hence  a 
more  harmonious  consumption  of  these  units.  This 
surplus  value  is  the  source  of  interest. 

The  cause  of  interest  was  present  before  capital  came 
into  use.  In  celebrating  a  wedding,  a  birth,  or  other 
social  events,  the  additional  goods  needed  for  this  end 
had  a  higher  utility  to  a  primitive  man  than  those  of 
everyday  use.  New  complements  were  formed  that 
perhaps  more  than  doubled  the  value  of  each  unit  of 
goods  necessary  to  complete  them.  He  was  willing, 
therefore,  to  borrow  the  necessary  funds  of  his  neigh- 
bors and  to  pay  a  high  rate  of  interest  for  them.  In 
this  he  was  justified  because  of  the  added  utility  of  the 
enlarged  complements.  The  pleasure  of  these  feast- 
days  more  than  made  up  for  the  privations  that  fol- 
lowed when  the  debt  was  paid. 

The  extra  expenses  of  burial  rites  and  of  charms  to 
drive  away  sickness  were  even  more  urgent,  and  for 
these  ends  borrowing  was  freely  resorted  to.  And 
these  expenses  were  also  legitimate.  The  greatest  total 
utility  is  obtained  by  a  primitive  man  from  irregular 
expenditures,  and  not  from  the  steady  outlays  approved 


i      f          \ 

Investments  103 

by  civilized  men.  If  the  desires  of  men  vary  in  intensity, 
an  unevenness  of  outlay  is  a  rational  use  of  income. 
There  are  thus  even  in  the  earliest  societies  motives  that 
lead  to  the  payment  of  interest.  Every  social  event 
enlarged  the  complement  of  goods  and  created  a  surplus. 
We  have  in  such  societies  a  surplus  to  consumers, 
making  it  advantageous  for  them  to  pay  interest.  For 
the  individual  interest-paying  was  justifiable,  but  not 
from  the  standpoint  of  the  public.  There  was_a_  loss 
in  goods  in  each  feast  or  rite  celebrated  and  no  corre- 
sponding gain  in  goods.  The  community  was  made 
poorer  even  if  the  individual  was  made  happier.  Early 
governments  and  religions  ruled  against  interest-paying, 
and  thus  protected  the  public  against  the  evil  results 
following  a  reduction  in  the  quantity  of  goods.  Inter- 
est-paying becomes  especially  bad  in  a  composite  com- 
munity where  a  minority  do  not  feel  the  need  of 
following  the  social  customs,  demanding  large  expendi- 
tures of  goods.  In  this  case  a  class  arises  that  lend 
to  others,  but  never  want  like  favors.  They  become  a 
creditor  class  who  constantly  exact  a  tribute  from  the 
public,  and  thus  cut  down  the  average  consumption  of 
citizens  by  the  amount  of  the  interest  paid  to  the  out- 
side class.  The  interest  fund  thus  becomes  a  public 
burden  without  any  compensation.  The  opposition  to 
money  lenders  is  natural  so  long  as  there  is  no  fund 
from  which  to  pay  interest.  To  bargain  away  future 
goods  for  passing  utilities  only  adds  to  misery.  And 
yet  the  tendency  to  do  this  is  strong  in  every  primitive 
man.  Interest-paying  is  thus  a  universal  tendency,  but 
a  bad  one  socially,  where  no  fund  of  goods  is  at  hand 
out  of  which  the  obligation  can  be  met.  The  cause  of 


• 

V 

IO4  The   Theory  of  Prosperity 

interest  is  the  extra  pleasure  added  by  the  last  increment 
of  each  complement  of  goods.  The  man  who  pays 
interest  always  has  an  extra  enjoyment  out  of  which  to 
pay  it.  The  value  of  goods  in  complements  is  greater 
than  the  value  of  individual  goods  composing  them. 
These  complements  grow  in  size  with  each  increase  in 
the  quantity  of  goods.  An  increase  of  goods  not  only 
supplies  more  wants ;  it  supplies  intenser  wants,  and 
puts  the  consumers  under  pressure  to  consume  more 
than  their  income.  The  struggle  for  additional  goods 
causes  them  to  bid  higher  for  these  goods,  and  thus 
the  fund  of  extra  pleasure  due  to  the  increased  size  of 
the  complements  is  transferred  to  producers.  The 
latter  get  what  the  conditions  of  increased  consump- 
tion create.  The  use  of  capital  goods  is  not  the  cause 
of  interest ;  it  only  creates  the  fund  out  of  which  inter- 
est is  paid,  and  thus  makes  the  natural  promptings  of 
the  consumer  harmonize  with  the  good  of  the  public. 

Future  goods,  unit  for  unit,  do  not  have  the  value  of 
present  goods.  The  converse  of  this  proposition  is 
equally  true  though  often  overlooked.  Where  present 
goods  are  overestimated,  the  labor  employed  in  making 
future  goods  is  raised  in  value  if  its  value  is  reckoned  in 
future  goods ;  or  to  put  this  fact  in  another  way,  when 
present  goods  are  raised  in  value,  the  makers  of  future 
goods  get  more  for  their  services,  measured  in  the 
articles  they  make.  The  demand  for  goods  creates  a 
demand  for  the  labor  that  makes  them.  The  lower 
value  of  future  goods  is  due  to  higher  value  of  labor. 
A  man  cannot  enjoy  goods  and  work  at  the  same  time. 
If  the  pleasure  of  enjoyment  is  increased,  the  wages 
of  labor  measured  in  what  is  made  must  also  go  up. 


Investments  105 

This  modification  of  values,  due  to  an  increase  of 
pleasure,  often  happens  where  no  future  production  is 
involved.  On  a  holiday  people  are  especially  desirous 
of  enjoying  themselves.  If  a  man  works  to  supply  these 

\  + 

intense  wants,  he  must  be  paid  a  higher  rate  of  wages. 

_  ^ 

If  the  pleasure  of  the  day  is  double  that  of  ordinary 
days,  the  wages  of  -those  who  work  must  be  doubled. 
These  men  must  take  their  enjoyment  on  the  ordinary 
days  that  follow,  and  must  therefore .  be  able  to  buy  , 
double  the  quantity  of  goods  to  get  the  same  net 
pleasure  that  other  people  had  on  the  holiday.  This 
exchange  is  the  same  in  essence  as  interest.  A  higher 
value  of  present  goods  demands  as  an  equivalent  a 
higher  value  of  the  labor  engaged  in  making  future 
goods.  If  a  man  gives  up  a  part  of  what  he  might 
enjoy  to-day,  to  produce  for  the  morrow,  he  must  be 
paid  more  in  the  goods  of  the  morrow  than  if  he  did 
not  forego  present  consumption.  If  100  units  of  pres- 
ent goods  is  valued  at  106  units,  the  maker  of  future 
goods  who  formerly  received  100  units  of  these  goods 
per  day  must  now  receive  106  units.  No  production  of 
future  goods  can  now  be  profitably  carried  on  unless 
the  return  is  sufficient  to  pay  the  workman  106  units  of 
goods  a  day.  There  must  be  an  increased  productivity 
of  labor  in  future  goods  to  correspond  to  the  increased 
value  of  present  goods.  The  use  of  capital  goods  per- 
mits this  increased  productivity.  There  is  now  a  fund 
of  goods  out  of  which  the  increased  wage  can  be  paid. 
The  value  of  future  goods  does  not  sink  as  low  as  it 
would  if  this  increased  wage  (measured  in  future  goods) 
was  not  required. 

If  present  goods  are  valued  six  per  cent  above  future 


1 06 


The   Theory  of  Prosperity 


goods,  wages  measured  in  future  goods  are  also  raised 
to  six  per  cent.  There  is  thus  an  objective  fund  in 
future  goods  equal  in  size  with  the  subjective  fund  of 
utility  created  by  the  extra  inducement  to  consume. 
The  laborer  has  six  per  cent  more  goods  if  he  takes 
future  goods,  and  he  has  the  same  amount  if  he  takes 
present  goods.  The  extra  goods  .that  make  up  the 
objective  interest  fund  do  not  come  from  his  wages, 
but  from  the  increased  productivity  of  capital  goods. 
Where  interest  is  paid,  the  marginal  productivity  of 
society  is  raised  by  a  like  amount.  The  interest  fund 
is  therefore  a  net  gain  to  society.  No  one  is  burdened 
by  its  payment. 

In  Diagram  XI  the  base  line  ab  shows  the  quantity  of 
goods  normally  consumed,  whose  utility  equals  the  area 

abed,  the  margin  of  con- 
sumption equals  the  line 
be,  and  the  expense  of 
production  is  measured 
by  the  distances  between 
the  lines  ab  and  kc.  If 
a  new  group  of  comple- 
ments could  be  formed 
by  the  addition  of  goods  to  the  amount  of  bf,  the  mar- 
ginal utility  would  be  increased  to  cf,  and  the  total  value 
of  all  the  goods  consumed  would  be  raised  from  the 
area  abcJi  to  a/eg.  Goods  to  the  amount  of  bf  would  thus 
increase  values  by  the  amount  of  the  areas  &r/"and  ccgh. 
The  interest  fund  in  this  case  is  the  added  value  per  unit 
of  goods  that  is  created  by  the  new  conditions.  It  would 
be,  if  measured  subjectively,  equal  to  the  area  gJnnc. 
The  ratio  of  ah  to  Jig  would  be  the  rate  of  interest. 


FIG.  XI 


Investments 


107 


Interest 


Diagram  XII  measures  the  same  fund  objectively. 
The  line  ab  equals  the  amount  produced  measured  in 
units  of  time,  say  days'  work.  In  the  most  productive 
occupation  ad  is  the  return  measured  in  goods.  This 
return  would  gradually  decrease  as  more  days'  work 
;  were  employed,  until  mb,  the  marginal  occupation,  is 
reached.  The  lower  value 
of  future  goods  being  the 
same  as  a  higher  value 
of  labor,  ag  represents 
wages  in  future  goods, 
while  aJi  shows  what  they 
would  be  in  present 
goods.  So  long  as  the 

rate  of  wages  equals  ag,  the  margin  of  production 
is  kept  at  mb.  There  is  thus  a  fund  of  goods  turned 
over  to  workers  equal  to  the  area  gJtcm.  These 
are  the  goods  through  which  interest  is  paid.  If 
they  were  not  given  to  workers,  wages  would  fall, 
and  production  would  be  extended  to  the  new  mar- 
gin, ef. 

The  net  effect  of  interest  is  to  stop  production  at  a 
higher  point  of  productivity  than  if  it  were  not  paid. 
If  there  were  no  need  of  paying  interest,  the  amount  of 
production  would  be  increased  from  ab  to  of.  More 
laborers  would  be  employed,  but  at  no  higher  rate  of 
wages.  This  quantitative  increase  of  society  would  be 
the  only  effect  of  the  disappearance  of  interest,  and 
even  this  change  would  be  slight  if  the  amount  of 
unused  resources  at  the  margin  of  production  were 
small.  Interest-paying  thus  slightly  checks  the  growth 
of  society,  but  imposes  no  burden  on  it.  The  interest 


loS  The  Theory  of  Prosperity 

jund  comes^  wholly  out  of  the  increased  margi"?1 
ductivity  caused  by  its  payment. 

Production,  it  should  always  be  remembered,  is  the 
making  of  goods,  and  interest  is  a  payment  in  goods. 
There  must,  therefore,  be  an  increased  productivity 
before  it  can  be  paid.  If  without  paying  interest  1000 
pounds  of  coal  can  be  mined  in  a  day,  1060  a  day  must  be 
mined  before  capital  valued  at  six  per  cent  can  be  used. 
If  100  yards  of  calico  are  made  by  a  workman  in  a 
week  without  any  fixed  capital,  he  must  at  least  produce 
with  capital  106  yards  in  the  same  time  before  it  will 
come  into  use.  In  all  cases  the  margin  of  production  is 
higher  after  the  use  of  capital  than  it  was  before.  The 
increased  productivity  may  be  much  more  than  suffi- 
cient to  pay  the  interest  demanded.  The  price  of 
goods  would  then  fall,  but  not  so  far  that  the  product 
of  the  marginal  laborer  under  the  new  conditions  will 
have  no  higher  value  than  his  product  under  the  old 
conditions.  The  new  marginal  product  is  much  greater 
in  amount  and  a  little  greater  in  value.  Interest  is  the 
difference  in  value  between  the  new  and  the  old 
marginal  product. 

The  two  views  thus  harmonize.  Interest  to  the  con- 
sumer is  an  extra  fund  of  utility  due  to  the  enlargement 
of  his  complements  of  goods.  The  struggle  for  this 
increased  pleasure  raises  the  value  of  goods,  and  gives 
an  extra  inducement  to  producers  to  increase  their  out- 
put. Interest  to  the  producer  is  a  fund  of  goods  paid 
for  the  use  of  capital  to  increase  his  productivity.  He 
pays  this  without  any  loss,  because  the  margin  of  pro- 
duction under  the  new  conditions  is  raised  by  the 
amount  of  the  interest  fund.  Labor  without  capital 


Investments  109 

can  still  make  the  same  return  as  before.  Labor  with 
capital  gets  an  extra  return  equal  to  the  rate  of  interest. 
The  payment  of  interest  is  no  more  of  a  burden  than  is 
the  payment  of  rent  to  a  farmer  on  superior  land.  There 
}s  in  each  case  an  extra  productivity  equal  to  the  cost 
of  the  superior  instrument  of  which  use  is  made.  Inter- 
est is  thus  a  kind  of  rent. 

Producers  and  consumers  both  get  an  advantage  out 
of  the  new  conditions.  There  is  an  increased  utility  to 
the  consumer,  and  an  increased  productivity  to  the 
worker.  In  each  day  or  stage  of  production  a  man 
makes  a  choice.  He  consumes  more  and  gets  the 
added  utility,  or  produces  more  and  gets  the  added 
productivity.  The  man  who  does  not  get  interest  is 
not  without  a  gain.  He  has  enjoyed  larger  comple- 
ments of  goods  than  he  otherwise  could  have  done,  and 
thus  has  secured  an  extra  fund  of  utility  equal  in  value 
to  the  interest  fund  going  to  others.  Interest-paying 
checks  the  mere  quantitative  growth  of  society  and 
forces  qualitative  changes  in  which  all  participate.  It 
represents  the  victory  of  modern  and  varied  consump- 
tion over  the  cruder  use  of  goods  that  formerly  pre- 
vailed. It  is  not  due  to  the  pain  of  abstinence,  but  to 
an  extra  inducement  to  consume.  Added  pleasures  of 
consumption  must  be  offset  by  an  increased  return  for 
working.  Primitive  costs  like  abstinence  and  primitive 
defects  like  the  lack  of  will  power  or  the  undervaluation 
of  the  future  will  disappear,  but  interest  must  endure 
while  complementary  goods  —  the  test  of  social  better- 
ment—  increase  the  pressure  that  causes  it. 

Interest  is  a  flow  of  income  to  the  holders  of  capital  Funded 
goods.      It    is    measured    subjectively   by   the    added  1] 


no  The  Theory  of  Prosperity 

utility  of  the  last  unit  of  consumption,  and  objectively 
by  the  increased  return  due  to  the  last  increment  of 
capital  goods.  Interest  is  price-making,  because  goods 
made  by  capital  have  their  value  raised  in  comparison 
with  those  made  by  labor.  There  are  always  move- 
ments in  prices  when  the  rate  of  interest  alters.  There 
is,  however,  a  kind  of  income  usually  regarded  as  inter- 
est that  is  not  price-making,  but  price-made.  It  is  due 
to  the  fact  that  different  parts  of  the  supply  of  certain 
articles  do  not  have  the  same  expense  of  production. 
Wheat  is  raised  on  land  of  different  degrees  of  fertility. 
The  price  must  be  high  enough  to  induce  cultivators  to 
produce  on  the  poorer  land.  This  price  is  more  than 
sufficient  to  pay  for  the  labor  and  capital  employed  on 
the  better  land.  There  is  thus  a  flow  of  income  to  the 
owners  of  this  land  to  which  the  name  rent  has  been 
given.  It  is  neither  wages  nor  interest. 

In  spite  of  the  fact  that  this  third  form  of  income  is 
not  interest,  it  is  properly  regarded  as  interest  by  men 
of  affairs.  The  reason  is  that  it  is  always  funded  and 
then  bought  and  sold  under  the  same  conditions  that 
capital  goods  are.  Funded  income  gets  its  price  from 
the  amount  of  the  income,  and  its  value  depends  upon 
the  rate  of  interest.  To  an  investor  an  income  to  the 
amount  of  one  hundred  dollars  has  the  value  of  an 
amount  of  capital  goods  that  will  yield  a  like  income. 
The  price  of  land  also  is  fixed  by  its  net  income  valued 
through  the  rate  of  interest.  With  the  same  net  return 
land  rises  and  falls  in  value  as  the  rate  of  interest 
changes.  All  funded  income  gets  its  value  in  this  way ; 
its  price  being  estimated  through  the  rate  of  interest 
it  becomes  so  much  like  capital  that  the  difference  is 


Investments  1 1 1 

overlooked.  Nor  is  the  difference  worthy  of  considera- 
tion while  production  remains  static.  The  income  is 
the  end  of  investment,  and  a  price-determined  income 
is  as  safe  as  a  price-determining  one.  The  difference 
appears  only  with  movements  in  price,  when  all 
funded  income  must  be  revalued  according  to  the  new 
rate  of  interest. 

To  meet  this  practical  situation  the  word  capital  must 
be  used  in  two  senses,  or  a  new  term  must  be  intro- 
duced. The  distinction  has  been  made  between  capital 
goods,  or  concrete  capital  embodied  in  objects  that  aid 
production,  and  social  capital,  which  includes  capitalized 
income,  as  well  as  the  concrete  aids  to  production. 
Land,  mines,  railroad  stock,  franchises,  and  other 
valuable  rights  and  privileges  are  capital  in  this  sense. 
They  are  all  investments,  and  must  be  contrasted  with 
capital  in  the  sense  of  capital  goods,  thus  giving  a  clear 
perception  of  the  difference  between  the  price-making 
income  due  to  capital  goods  and  the  price-made  income 
arising  from  differential  expenses  or  from  monopoly. 

This  price-made  income  like  rent  is  the  effect  of  price 
and  not  its  cause,  yet  it  is  due  to  a  movement  in  prices. 
Income  is  always  derived  from  price  relations,  and 
funded  income  is  no  exception  to  the  universal  rule. 
Before  the  rent  of  land  can  increase,  there  must  be  a 
rise  in  the  price  of  food,  for  increasing  prices  of  agricul- 
tural products  go  with  increasing  rents.  Yet  rents  are 
not  the  cause  of  the  high  prices,  since  the  price  move- 
ment comes  before  the  rise  of  rent.  Rising  prices 
also  precede  the  funding  of  income.  The  goods  from 
which  the  funded  income  is  drawn  are  no  higher  in 
price  than  similar  goods  from  which  there  is  no  income 


112  TJic   Theory  of  Prosperity 

of  this  kind.  It  is  a  result  of  the  causes  that  fix  the 
prices  of  goods  for  which  they  can  be  substituted.  It  is 
thus  price-made,  yet  some  article  has  changed  in  price 
whose  place  it  can  at  least  partially  take. 

Funded  income  is  always  differential.  This  does  not 
seem  true  because  so  many  monopolized  articles  yield 
an  extra  profit  on  all  parts  of  the  supply.  Each  gallon 
of  coal  oil  sells  for  more  than  its  labor  price,  and  thus 
yields  a  large  marginal  profit.  It  seems,  therefore,  to 
differ  from  the  products  of  land,  some  part  of  which 
sells  at  its  labor  price  and  thus  pays  no  rent. 

The  difference,  however,  is  not  real.  Land,  in  the 
sense  economists  use  it,  is  not  a  concrete  object  with 
given  qualities.  It  is  an  abstract  concept  including  all 
the  sources  from  which  food  comes.  If  it  were  defined 
concretely  in  terms  of  soil,  climate,  or  geographical 
position,  all  of  many  kinds  of  land  would  yield  a  rent. 
Even  if  a  more  abstract  classification  of  land  were  used 
and  it  were  divided  into  wheat  land,  corn  land,  plough 
land,  pasture  land,  and  wood  land,  all  of  some  of  those 
kinds  of  land  would  pay  rent.  It  is  only  when  all 
definite  qualities  are  lost  sight  of,  and  land  is  thought 
of  merely  as  a  food-producing  unit,  that  a  truly  differ- 
ential series  is  found.  Of  these  abstract  units  of  land 
we  may  be  sure  that  some  pay  no  rent,  but  of  any 
concrete  kind  of  land  all  its  units  may  pay  rent. 

Put  in  this  way,  the  same  facts  are  true  of  commodi- 
ties. All  of  any  commodity  may  pay  rent,  just  as  may 
any  concrete  kind  of  land.  But  abstract  units  also 
exist  among  commodities.  They  supply  wants,  and  each 
want  may  be  satisfied  in  a  variety  of  ways.  Men  want 
light,  and  one  way  of  supplying  it  is  to  buy  coal  oil.  But 


Investments  1 1 3 

*_ 

for  coal  oil  there  are  many  substitutes;  and  every  article 
that  gives  light  must  be  made  a  part  of  the  group  of 
goods  by  which  light  is  produced.  We  must  therefore 
think  not  in  terms  of  coal  oil,  gas,  electricity,  lard  oil,  i 
and  whale  oil,  but  abstractly  of  units  of  supply.  Put  i 
all  these  articles  in  a  series,  and  we  have  an  abstract 
unit  like  land.  Arrange  them  in  order  of  their  expense 
of  production,  and  the  series  will  be  differential  just  as 
the  products  of  the  land  are.  There  is  always  a  price- 
determining  unit  of  supply  for  each  want.  All  other 
units  of  supply  have  their  value  set  by  this  unit,  and  they 
yield  a  rent  equal  to  the  difference  between  their  expense 
of  production  and  that  of  the  marginal  unit  of  supply.  , 

The  law  of  rent  is  merely  an  outcome  of  the  law  of 
substitution.  Articles  used  in  supplying  the  same  want 
have  the  same  price.  If  they  differ  in  the  expense 
of  their  production,  the  cheaper  articles  yield  a  rent. 
Rent  appears  when  the  supply  of  goods  capable  of 
satisfying  a  want  is  less  than  the  demand.  The  price 
rises,  and  more  expensive  units  of  supply  are  made  use 
of.  The  cheaper  goods  now  give  an  extra  profit  that 
may  be  funded;  but  in  this  land  does  not  differ  from 
other  forms  of  production.  Every  series  of  goods  sup- 
plying a  single  want  forms  a  group  with  one  price-deter- 
mining unit  of  supply.  Each  particular  good,  however, 
has  a  definite  expense  of  production  just  as  does  each 
concrete  kind  of  land. 

Any  concrete  good  has  the  same  expense  for  all  its  I 
units.     Every  abstract  group  made  up  of  goods  supply-  * 
ing  a  single  want  makes  a  differential  series  with  one 
price-determining  unit.     Each  good  is,  therefore,  a  part 
of  two  groups.     As  a  concrete  object,  it  is  a  part  of  a 


114  The   Theory  of  Prosperity 

group  of  like  objects  having  one  cost  of  production.  In 
its  want-supplying  power  it  is  a  part  of  an  abstract 
group  having  a  varying  expense  of  production.  Viewed 
concretely,  a  given  good  may  have  a  marginal  profit  on 
each  of  its  units.  We  can,  therefore,  say  that  it  yields 
a  marginal  return  above  expenses.  Viewed,  however, 
abstractly  as  a  supplier  of  wants,  this  marginal  profit 
becomes  a  differential  rent.  The  marginal  profit  on 
the  concrete  good  exists  because  some  unit  of  supply 
is  more  expensive  than  it.  A  given  return,  therefore, 
becomes  profit  or  rent  according  as  the  good  that  pro- 
duces it  is  viewed  concretely  or  abstractly.  The  producer 
makes  concrete  objects,  and  views  them  concretely;  his 
extra  return  is  marginal,  and  he  calls  it  profit.  The  con- 
sumer views  goods  abstractly  as  units  of  supply,  and  for 
each  want  there  is  a  price-determining  unit,  whose  cost 
fixes  the  extra  return  on  all  other  units.  This  extra 
return  is  differential,  and  those  who  pay  it  call  it  rent. 
Profit  and  rent,  however,  are  not  two  funds ;  they  are 
onj  fund  viewed  in  different  lights. 

Let  it  be  assumed  that  a  given  district  is  supplied 
with  light  from  four  sources,  whale  oil  at  a  cost  of  ten 
cents  per  unit,  electricity  at  nine  cents,  coal  oil  at  eight 
cents,  and  gas  at  seven  cents.  If  these  units  of  light 
were  equally  satisfactory  to  consumers,  the  price  would 
be  ten  cents  per  unit  so  long  as  all  four  kinds  of  light 
were  used.  On  the  electricity  used  there  would  be  an 
extra  return  of  ten  per  cent,  which  would  be  called 
profit  by  the  owners  of  the  electric  plants,  and  would  be 
a  marginal  return  on  the  concrete  capital  they  employed. 
On  the  capital  used  by  those  who  furnish  the  coal  oil 
there  would  be  a  return  of  twenty  per  cent,  and  on  the 


Investments  \  1 5 

capital  of  the  gas  company  the  return  would  be  thirty 
per  cent.  All  these  profits  would  be  marginal ;  dividends 
to  these  amounts  would  be  given  on  all  the  real  capital 
of  each  company.  At  the  same  time  this  whole  extra 
return  would  be  rent  if  viewed  from  the  standpoint  of 
units  of  supply.  Each  such  unit  would  yield  a  rent  equal 
to  the  difference  between  its  expense  and  that  of  a  unit 
of  whale  oil.  Getting  its  value  from  the  rate  of  interest 
on  capital  goods,  it  either  is  or  may  be  funded.  It  is 
thus  lost  sight  of  as  a  distinct  fund,  and  is  confused  with 
interest  by  the  business  world.  Profit  is  a  per  cent  of 
advance  on  concrete  goods.  Rent  is  a  differential  based 
on  abstract  units  of  supply.  Those  who  get  an  extra 
return  call  it  profit,  and  impute  it  to  their  capital.  Those 
who  pay  it  call  it  rent,  and  think  of  it  as  unearned  incre- 
ments of  income.  This  means  that  in  an  abstract  series 
all  price-determined  income  is  differential,  but  in  its 


concrete  form  it  is  marginal. 


FIG.  xm 


Rent 

Whale  Oil 

Electricity 

Coal  Oil 

Gas 

10c 

9c 

8c 

.     7c  - 

These  facts  may  be  presented  in  a  diagram  by  letting 
the  base  line  represent  units  of  supply,  and  the  upright 
lines  the  price  of  the  different  units.  The  whole  dia- 
gram would  then  represent  the  total  cost  of  light  to  the 
district.  The  upper  part  of  the  diagram  is  the  rent  that 
may  be  funded. 


1 1 6  The  TJieory  of  Prosperity 

The  preceding  discussion  has  helped  to  simplify  the 
problem  of  income.  There  is  one  kind  of  income 
derived  from  the  exertion  of  human  energy  and  another 
from  the  use  of  capital  goods.  These  two,  wages  and 
interest,  are  the  only  price-determining  elements,  and 
thus  are  the  causes  of  price  movements.  There  is  also  a 
third  kind  of  income  that  is  price-determined.  Looked 
at  in  one  way  it  is  a  funded  income,  in  another  it  is 
an  unearned  or  costless  income.  In  some  of  its  forms  it 
has  been  called  rent  and  in  others  profits.  It  is,  however, 
one  fund  and  governed  by  one  law.  When  there  is  an 
upward  movement  in  the  price  of  any  unit  of  supply, 
unearned  income,  funded  income,  price-determined  in- 
come, profits  or  rent  appear.  It  matters  not  what  it 
is  called.  It  is  the  same  fund,  however  viewed  or 
named. 

While  this  analysis  gives  three  kinds  of  income,  the 
business  world  recognizes  but  two.  Both  employer 
and  employed  divide  income  into  two  parts  and  attrib- 
ute to  the  other  all  that  is  not  in  the  part  which  they 
share.  "  All  that  is  not  profits  is  wages,  and  all  that 
is  not  wages  is  profits."  This  is  not  a  mere  statement 
of  John  Stuart  Mill.  It  is  echoed  by  every  business 
man  and  by  every  workman.  An  apparent  opposition 
is  thus  created  between  the  return  on  capital  and  labor. 
It  is  felt  and  asserted  that  one  form  of  income  cannot 
grow  but  at  the  expense  of  the  other.  Each  recipient 
of  income  recognizes  that  it  comes  from  a  particular 
source,  and  sees  it  decrease  or  increase  because  of 
changed  relations  to  another  source  of  income.  Now 
there  are  but  two  concrete  sources  of  income,  human 
labor  and  capital  goods.  Nothing  of  value  is  ever 


Investments  117 

produced  but  where  one  or  both  of  these  exist.  They 
are  the  only  concrete  objects  in  production,  and  any 
thoroughly  concrete  view  of  it  must  impute  all  income 
to  one  or  the  other  of  them.  Where  then  is  the  un- 
earned income  called  rent,  if  neither  laborers  nor  capi- 
talists admit  its  existence  in  the  income  they  receive  ? 

From  either  point  of  view,  then,  there  is  a  direct 
opposition  between  interest  and  wages.  The  whole 
return  from  industry  is  assumed  to  go  into  one  or  the 
other  of  these  two  funds.  If,  then,  quantity  of  capital 
is  fixed,  what  each  additional  laborer  adds  to  the  total 
product  is  his  natural  wages,  and  determines  what  all 
other  laborers  shall  receive.  Wages  are  thus  measured 
at  the  margin  of  production,  and  rise  or  fall  as  the 
margin  of  production  changes.  When,  however,  the 
number  of  laborers  is  fixed,  what  an  additional  incre- 
ment of  capital  adds  to  the  total  product  equals  the 
rate  of  interest.  The  owners  of  other  capital  goods  can 
get  no  more  than  is  created  by  the  marginal  increment 
of  capital.  Interest  is  thus  measured  at  the  margin 
of  production,  and  rises  or  falls  with  it.  Production, 
thus  viewed  from  the  standpoint  of  the  capitalist, 
makes  interest  marginal  and  the  only  marginal  return. 
Viewed,  however,  by  the  laborer  wages  are  marginal 
and  the  only  marginal  return.  Wages  and  interest  can 
thus  in  turn  be  represented  as  differential  and  marginal. 

In  the  first  diagram1  interest  is  marginal,  and  the 
amount  of  wages  is  the  difference  between  the  total 
product  and  the  amount  of  interest  measured  by  the 

1  These  diagrams  are  taken  from  Professor  Clark's  recent  book  on 
"The  Distribution  of  Wealth  "  (p.  330),  to  which  the  reader  is  referred  for 
a  more  complete  discussion. 


The  Theory  of  Prosperity 


marginal  return  on  capital.  Wages  in  the  second  dia- 
gram is  marginal,  and  interest  is  the  difference  between 
the  total  product  and  the  amount  of  wages  measured  by 
the  product  of  the  marginal  laborer.  As  both  diagrams 
represent  the  total  product,  wages,  as  differentially 
determined  in  the  one,  must  equal  wages  marginally 
determined  in  the  other.  The  two  areas  representing 
interest  are  equal  for  the  same  reasons.  The  whole 
product  from  either  point  of  view  becomes  wages  and 
interest  and  nothing  else.  There  is  no  unearned  income 


FIG.  XIV 


Wages 


Interest 


FIG.   XV 


Interest 


Wages 


in  sight,  and  the  popularly  conceived  opposition  between 
the  two  seems  to  be  justified. 

Let  us,  however,  examine  more  closely  the  full  mean- 
ing of  these  diagrams  and  the  ideas  they  represent. 
When  it  is  said  that  the  number  of  laborers  is  fixed  and 
the  quantity  of  capital  goods  increases,  it  seems  as  if  all 
the  additional  return  were  due  to  the  increase  of  the 
capital  goods.  This,  however,  is  not  true.  Capital 
goods  are  made  productive  by  some  application  of 
force,  but  not  necessarily  by  some  application  of  labor. 
Labor  and  labor  force  are  different.  The  latter  includes 
more  than  the  former.  Labor  means  a  number  of  days' 
work  done  by  human  beings.  Labor  force  is  any 
mode  of  motion  that  makes  capital  goods  productive. 


Investments  \  \  9 

A  machine  can  be  set  in  motion  by  human  hands  ;  it 
can  also  be  set  in  motion  by  water-power,  wind,  steam, 
or  gravitation.  Each  of  these  is  a  part  of  labor 
force  in  the  sense  that  they  are  substitutes  for  human 
exertion,  and  must  be  reckoned  with  in  any  attempt  to 
make  an  additional  quantity  of  capital  goods  productive. 

If  the  number  of  laborers  is  fixed  and  the  quantity  of 
capital  goods  increases,  it  does  not  mean  that  there  is 
no  increase  of  labor  force.  Many  natural  forces  will 
be  used  to  make  the  capital  effective,  and  the  laborers 
themselves,  although  no  more  in  number,  represent 
more  labor  force.  If  a  man  tends  three  machines  in- 
stead of  two,  there  is  with  this  increase  of  capital  no 
increase  in  the  number  of  days'  work.  But  each  laborer 
is  used  more  effectively,  and  certain  qualities  in  him 
that  were  dormant  when  he  tended  but  two  machines 
become  active  when  he  tends  three.  If  a  farmer  buys 
a  windmill,  he  does  not  necessarily  employ  more  labor- 
ers, but  he  who  cares  for  it  is  more  efficient.  The 
labor  force  has  thus  increased  with  this  growth  of 
capital. 

The  contrast  is  not  between  capital  goods  and  the 
day's  work  of  a  fixed  number  of  laborers.  With  capital 
must  be  contrasted  all  the  forces,  natural  and  human, 
that  determine  its  productivity.  These  natural  forces 
are  indefinite  in  number,  and  vary  in  their  usefulness 
with  the  amount  of  capital.  Every  increase  in  capital 
makes  them  more  effective,  and  thus  increases  their 
number  considered  solely  as  aids  to  the  utilization  of 
capital.  Laborers,  too,  are  not  single  units  in  their 
relation  to  capital.  They  are  to  be  regarded  as  having 
in  them  a  number  of  different  possibilities  for  making 


I2O  The  Theory  of  Prosperity 

capital  effective,  each  of  which  is  more  or  less  fully  used 
according  as  the  quantity  of  capital  with  which  they 
come  in  contact  is  great  or  small.  Some  of  them  may 
not  be  used  at  all  if  the  quantity  of  capital  is  limited. 
It  is  hard  to  see  how  an  increase  of  capital  should  fail 
to  draw  out  of  the  laborers  some  hitherto  dormant 
power.  The  possible  powers  in  men  for  the  utilization 
of  capital  are  as  large  and  as  indefinite  as  are  the  forces 
of  nature  having  the  power  of  aiding  capital. 

We  cannot,  therefore,  correctly  contrast  capital  goods 
with  days'  work  and  say  that  all  production  is  due  to 
them  and  that  the  product  should  be  divided  between 
them.  The  true  contrast  with  capital  is  labor  force, 
using  the  latter  term  in  so  broad  a  sense  that  it  will 
include  every  natural  or  human  agency  making  capital 
productive.  Viewed  in  this  way  labor  force  is  abstract, 
capital  goods  are  concrete.  Labor  force  yields  a  differ- 
ential return  ;  the  return  on  capital  is  marginal.  Some 
of  these  units  of  labor  force,  when  combined  with  capital, 
are  very  effective ;  others  are  less  so,  while  still  others 
increase  but  little  the  effectiveness  of  the  capital  em- 
ployed with  them.  There  are  thus  marginal  units  of 
labor  force  that  yield  no  additional  return.  The  return 
on  other  units  is  measured  by  their  additional  return  just 
as  the  rent  of  good  land  is  fixed  by  marginal  land.  In 
fact  the  case  of  land  is  but  an  example  of  the  difference 
in  the  effectiveness  of  the  units  of  labor  force  connected 
with  it.  With  every  increase  of  capital  on  land  some 
new  units  of  labor  force  are  made  effective  or  have 
their  effectiveness  increased. 

It  can  now   be  seen  what  the  third  form  of  income 
—  that  which  is  not  interest  or  wages  —  is,  and  how  it 


Investments  1 2 1 

grows.  Labor  force  is  made  up  of  a  number  of  con- 
crete days'  work  and  of  a  group  of  substitutes  for  labor. 
Wherever  a  natural  force  is  utilized  as  a  substitute  for 
labor,  or  a  new  utilization  of  laborers  is  made  not  involv- 
ing an  increase  in  their  number,  the  additions  to  the 
productivity  of  capital  made  in  this  way  go  to  the  per- 
sons controlling  these  forces.  This  increased  produc- 
tivity of  capital  is  valued  at  the  price  of  the  labor  for 
which  they  are  substituted. 

From  this  point  of  view,  rent  is  the  price  of  labor 
substitutes.  They  do  not  increase  the  price  of  products, 
because  goods  made  by  them  have  the  same  price  as 
those  made  by  men.  The  price-fixing  articles  are  always 
those  made  by  labor.  The  substitutes  do  not  influence 
price,  nor  are  they  used  at  the  expense  of  the  laborers 
or  of  the  capitalists.  Neither  wages  nor  the  interest  on 
capital  goods  are  altered.  Whoever  pays  rent  increases 
his  productive  power  by  the  exact  amount  of  rent.  This 
superiority  is  clue  to  the  use  of  some  labor  force  that 
permits  him  to  dispense  with  laborers.  It  is  to  him 
a  matter  of  indifference  whether  this  labor  force  or 
more  laborers  are  employed.  The  expenditure  of  funds 
is  the  same.  It  is  proper,  therefore,  to  think  of  the 
fund  paid  out  in  this  way  as  wages.  It  has  its  value 
fixed  by  wages,  and  comes  from  the  same  source  as  do 
wages.  The  wages  fund,  when  the  term  is  rightly  used, 
includes  all  money  paid  for  labor  and  for  all  substitutes 
for  labor. 

It  is  this  wages  fund,  not  true  wages,  that  is  the  fund 
to  be  contrasted  with  the  interest  on  capital  goods.  All 
return  from  industry  is  either  interest  or  a  part  of  the 
wages  fund.  The  wages  fund  in  this  broad  sense  is  a 


122  The  Theory  of  Prosperity 

differential  to  interest,  which  as  a  return  for  capital  goods 
is  marginal.  There  is  thus  a  meaning  to  the  diagram 
just  used,  if  wages  fund  be  put  in  the  place  of  wages. 
Rent  is  wage-determined,  but  not  wages.  Thrown  to- 
gether, the  two  make  a  true  differential  that  stands  in 
contrast  with  interest. 

Changing  the  point  of  view,  capital  goods  is  made  a 
fixed  quantity,  and  labor  an  increasing  quantity.  Addi- 
tional labor,  in  the  sense  of  more  days'  work,  adds  a 
decreasing  amount  to  the  total  product.  Labor  thus 
becomes  marginal,  and  the  marginal  return  to  the  labor 
fixes  the  pay  of  all  laborers.  To  total  wages  in  this 
concrete  sense,  all  the  rest  of  the  income  of  society  is 
the  residual.  When  a  few  laborers  were  employed  with 
all  the  capital,  the  return  was  great,  but  it  gradually 
decreases  as  the  number  of  laborers  increases.  The 
capital  goods  must  be  divided  among  a  larger  number 
of  workmen.  Thus  their  efficiency  falls  off,  and  when 
measured  at  the  margin  the  return  to  capital,  being  the 
residual,  is  differential.  Capital  in  this  sense  is  not 
merely  capital  goods,  but  all  valuable  objects  that  aid 
labor.  Capital  goods  are  important  to  laborers  because 
they  increase  the  efficiency  of  labor.  Anything,  how- 
ever, that  does  this  is  capital  in  the  sense  of  aiding 
production.  Capital  goods  are  the  aids  to  production 
made  by  labor.  In  addition  to  these  there  are  many 
aids  to  labor  not  made  by  it,  of  which  land  is  an  example. 
The  forces  and  material  embodied  in  it  aid  workmen, 
but  are  not  made  by  them.  Contributions  are  also 
made  by  many  artificial  things.  Corporations,  fran- 
chises, laws,  customs,  rights,  moral  qualities,  peculiar 
abilities,  whether  natural  or  acquired,  and  a  great 


Investments  123 

variety  of  other  objects,  qualities,  and  forces,  contrib- 
ute more  or  less  to  the  output  of  goods.  In  so  far 
as  they  do,  they  are  valued  by  the  income  they  create, 
and  become  a  part  of  the  social  capital.  All  these 
must  be  put  with  capital  goods  to  make  up  the  social 
capital  whose  income  is  the  residual  to  the  sum  of 
wages.  Each  additional  laborer  adds  something  to 
the  value  of  this  social  capital  if  his  presence  forces 
down  the  margin  of  production.  Some  of  the  income 
that  went  to  other  laborers  is  now  taken  from  them, 
and  increases  the  incomes  of  holders  of  land,  fran- 
chises, or  other  valuable  rights.  The  marginal  capital 
is  not  capital  goods,  but  some  of  those  artificial  objects 
that  become  capital  through  the  income  they  absorb. 
To  withdraw  labor  does  not  mean  to  throw  capital 
goods  out  of  use ;  it  may  mean  merely  the  destruction 
of  social  capital  by  taking  away  its  income.  Some 
land,  franchise,  or  right  becomes  less  capital,  or  ceases 
to  be  capital  because  it  yields  no  income. 

Capital  as  a  differential  to  labor  is  all  social  capital  — 
the  whole  field  of  investments.  It  includes  not  merely 
productive  capital  goods,  but  also  all  sources  of  income 
at  their  capitalized  value.  Interest  proper  is  the  return 
on  capital  goods.  The  interest  fund  is  much  more  than 
this  amount.  It  includes  the  income  of  all  objects  meas- 
ured by  the  rate  of  interest.  The  income  of  a  railroad 
corporation  or  of  a  street  railway  —  no  matter  how  much 
the  stock  is  watered — belongs  to  the  interest  fund. 
The  value  of  this  stock  is  determined  by  the  rate  of 
interest,  and  so  also  is  that  of  any  other  income  that 
may  be  funded. 

It   is  this  interest  fund  in  its   entirety  that   is   the 


124 


The  Theory  of  Prosperity 


residual,  and  hence  the  differential  to  the  total  sum 
of  wages.  Concrete  wages  is  marginal;  to  this  fund 
all  interest  and  all  income  whose  sources  are  valued 
through  the  rate  of  interest  is  a  differential.  Interest 
proper,  that  is,  the  return  on  capital  goods,  is  also 
marginal ;  to  this  fund  all  the  income  derived  from 
labor  force  considered  as  an  abstract  quantity  is  a 
differential.  These  two  points  of  view  presented  in 
diagrams  appear  as  follows  :  — 


FIG.  XVI 


Interest  Fund 


Wages 


FIG.   XVII 


Wages  Fund 


Interest 


In  the  first  diagram  the  whole  number  of  concrete 
days'  work  is  contrasted  with  the  income  derived  from 
the  whole  field  of  investment.  In  the  second,  the 
income  derived  from  all  capital  goods  is  separated  from 
that  coming  from  the  whole  labor  force,  whether  natural 
or  human.  The  interest  fund  in  the  one  is  more  than 
the  interest  in  the  other.  So,  too,  is  the  wages  fund  in 
the  one  more  than  the  wages  in  the  other.  There  is 
a  fund  not  interest  or  wages  in  the  concrete  sense  that 
is  present  in  both  differentials.  The  hidden  difference 

Interest  fund  —  interest  =  wages  fund  —  wages. 

on  both  sides  of  the  equation  is  the  funded  income  of 
society  or  rent.  Rent  is  wages  in  the  sense  that  it  is 
measured  by  the  amount  of  labor  it  displaces.  It  is 
interest  in  the  sense  that  its  source  is  valued  through 


Investments  125 

the  rate  of  interest.  This  source  is  a  thing,  and  hence 
capital  to  the  investor.  To  the  producer  it  is  a  force, 
and  hence  labor  or  a  labor  economizer.  Each  sees  it  as 
a  part  of  the  other  agent  in  production,  because  it  must 
be  bought  and  paid  for  as  if  it  were  a  part  of  this 
contrasted  agent.  Rent  is  not  an  item  of  expense  to 
either  capitalist  or  laborer.  All  goods  have  their  prices 
fixed  by  units  of  supply  on  which  no  rent  is  paid.  It 
is  no  wonder,  therefore,  that  rent  is  overlooked  or  seems 
a  part  of  other  funds. 

When  two  quantities  are  contrasted  so  as  to  make 
one  marginal  and  the  other  a  differential,  the  one  con- 
sidered marginal  is  made  up  of  concrete  units,  while  the 
second  is  composed  of  discrete  or  abstract  units.  Capi- 
tal goods  and  laborers  are  concrete.  Investments,  land, 
and  labor  force  exist  in  a  multitude  of  diverse  forms. 
The  wages  of  laborers  cannot  become  a  differential  to 
the  return  on  capital  goods,  nor  can  the  reverse  be  true. 
Each  of  these  concrete  objects  must  be  contrasted  with 
an  abstract  unit  made  up  of  all  the  remaining  forces 
and  agents  of  production.  Units  of  this  latter  kind  are 
the  only  ones  that  form  a  true  differential  with  concrete 
capital  or  labor.  When  capital  goods  are  considered 
marginal,  laborers  are  among  the  objects  grouped  to- 
gether to  make  the  opposing  abstract  unit.  Capital 
goods,  also,  are  a  part  of  the  group  of  discrete  objects 
contrasted  with  labor  as  a  marginal  quantity.  But  in 
neither  case  is  the  concrete  element  in  the  differential 
its  only  constituent.  Many  diverse  objects  are  put  in 
with  it  so  as  to  create  the  grading  needed  for  the 
differential.  Two  concrete  sources  of  income  cannot 
be  differential  to  each  other.  If  two  or  more  concrete 


126  T!ie  Theory  of  Prosperity 

agents,  acting  without  external  aid,  produced  income, 
the  return  from  this  production  would  be  constant  and 
hence  there  would  be  no  differential. 

The  static  Under  the  simple  conditions  of  a  stationary  society, 

am<  labor  and  capital  do  not  change  in  amount  nor  are  they 
utilized  in  new  ways.  There  are  no  dynamic  changes, 
all  disturbances  and  friction  disappear,  competition  be- 
comes general,  and  labor  and  capital  are  mobile.  The 
standards  thus  created  are  said  to  be  normal  or  natural. 
Each  commodity,  it  is  held,  sells  for  enough  to  pay  the 
usual  rates  of  wages  and  interest  and  for  no  more. 
There  is  then  no  net  surplus,  no  residual,  nor  any 
funded  income,  for  an  investment  could  not  rise  in 
value  above  the  value  of  the  capital  goods  used  in  it. 
Profits  as  they  appear  in  dynamic  society  are  the  net 
gains  of  the  industrial  managers  who  invent  new  pro- 
cesses or  organize  their  laborers  more  efficiently.  So 
long  as  these  inventions  and  methods  are  not  generally 
known,  those  introducing  them  get  a  profit  above  the 
usual  return,  but  this  profit  tends  to  disappear  as  other 
managers  gradually  make  use  of  these  inventions  or 
processes.  But  as  they  do,  new  inventions  and  methods 
are  introduced  by  the  more  enterprising.  Profits  of  this 
kind  are  peculiarly  dynamic  in  nature.  They  come 
only  with  progress,  and  disappear  when  the  results  of 
progress  are  utilized  by  the  public.  Plainly  these 
profits  would  cease  in  static  society,  and  no  new  ones 
would  be  created.  There  seems,  therefore,  to  be  no 
need  of  considering  anything  but  wages  and  interest. 

This  conclusion,  however,  is  not  correct.  The  profits 
of  which  mention  has  been  made  are  those  of  falling 
prices  due  to  improved  processes.  When  improve- 


Investments  127 

ments  cease,  these  also  cease.  But  there  are  gains  due 
to  rising  prices,  and  these  do  not  disappear  in  a  static 
society.  The  gains  of  managers  are  of  two  kinds  — 
inventors'  gains  clue  to  falling  prices  and  promoters' 
gains  due  to  rising  prices.  Inventors  watch  the  rela- 
tion between  men  and  nature,  and  take  advantage  of 
any  possible  adjustment.  Promoters  watch  values. 
They  foresee  upward  tendencies  in  prices  either  relative 
or  absolute,  and  take  advantage  of  the  conditions  creat- 
ing rising  prices  to  fund  the  income  coming  in  this  way. 
These  advantages  will  not  be  taken  away  in  a  static 
society.  They  are  perpetuated,  hidden  in  forms  that 
make  them  seem  to  be  capital.  The  presence  of  funded 
income,  however,  can  be  tested  by  comparing  the  value 
of  total  investments  with  that  of  the  total  capital  goods. 
There  is  funded  income  if  the  former  exceeds  the  latter. 
In  a  static  society  rent,  profit,  and  funded  income  are 
the  same,  and  their  name  is  a  matter  of  indifference. 

Funded  income  or  rent  stands  in  direct  contrast  with 
wages.  A  fall  in  wages  gives  an  increased  value  to 
objects  that  labor  uses  in  production,  and  causes  an 
increased  flow  of  income  to  their  owners.  This  income 
remains  in  their  hands  until  a  rise  in  wages  takes  it 
away.  There  being  nothing  in  a  static  state  to  create  a 
rise  in  wages,  it  would  continue  as  rent,  and  be  enjoyed 
by  others  than  capitalists  and  laborers.  The  third  form 
of  income  is  never  absent  even  in  a  static  state. 

Suppose  the  income  of  a  society  to  be  equal  to  the 
figure  abed  of  which  abce  is  wages  and  ccd  is  interest. 
If  the  rate  of  wages  falls  through  an  increase  of  work- 
men, the  return  would  now  equal  the  area  aJigd,  of 
which  ahgf  would  be  wages.  There  is  now  a  new  area 


128 


The   Tlieory  of  Prosperity 


ecfg.  Will  it  go  to  the  holders  of  capital  goods  as 
interest  ?  No.  If  labor  and  labor  products  have  fallen 
in  price,  some  other  objects  must  have  risen  in  price,  or 
labor  and  its  products  could  not  have  fallen.  Capital 
goods  being  made  by  labor  cannot  rise  in  price  when 
labor  falls,  unless  there  is  some  lack  in  the  mobility  of 
labor,  for  mobile  labor  being  free  to  move  in  any  direc- 
tion would  flow  from  industries  making  consumption 
goods  to  those  making  capital  goods,  if  the  latter  rose 
in  price.  The  owners  of  capital  goods  are,  therefore, 
prevented  from  obtaining  the  income  ecfg  for  the  same 
reasons  that  the  laborers  are.  Capital  goods  are  a 


FIG.  XVIII 


function  of  labor.  Where  labor  is  mobile  they  must 
fall  and  rise  in  price  together.  This  new  income  must 
go  elsewhere.  It  is  funded  by  those  who  foresee  where 
prices  are  to  rise,  and  the  securities  they  create  become 
a  part  of  the  permanent  investments  of  society. 

Let  it  be  assumed  that  the  -quantity  of  capital  is 
limited,  and  that  the  number  of  the  laborers  is  increas- 
ing. In  this  case  the  wages  of  the  laborers  would  de- 
crease as  their  number  increased.  If  the  return  when 
one  laborer  used  all  the  capital  is  twenty  units  of  goods, 
thirty  units  when  two  laborers  used  it,  thirty-nine  for 
three,  forty-seven  for  four,  fifty-four  for  five,  and  sixty 


Investments 


129 


for  six  laborers,  the  following  table  would  represent  the 
division  of  the  return,  C  standing  for  the  amount  of  capi- 
tal and  L  for  a  unit  of  labor. 


100  units  of 

Inducement 

No.  of 
laborers 

Product 

Pay  per 

laborer 

Total  wages 

Amount  left 
for  capital 

present  goods 
produce  in 

to  increase 
capital 

future  soods 

goods 

I 

20 

2 

3° 

10 

20 

10 

no 

O 

3 

39 

9 

27 

12 

I  12 

2 

4 

47 

8 

32 

15 

i'5 

5 

5 

54 

7 

35 

19 

119 

9 

6 

60 

6 

36 

24 

124 

H 

7 

65 

5 

35 

30 

130 

20 

8 

69 

4 

y- 

37 

137 

27 

It  should  be  noticed  that  the  share  assigned  to  capital 
is  not  determined  positively  but  negatively,  by  attributing 
to  it  all  that  cannot  under  the  conditions  go  to  the  labor- 
ers.1 They  get  an  amount  equal  to  the  marginal  return 
multiplied  by  their  number.  But  can  all  this  residual 
go  to  the  holders  of  capital  goods,  and  if  they  do  get 
it,  can  it  properly  be  called  interest  ?  When  two  labor- 
ers use  the  capital,  the  return  on  it  is  10  units;  when 
six  men  use  it,  the  return  is  24  units.  This  larger 
return  on  each  unit  of  capital  goods  could  not  but 
increase  its  value.  If  the  capital  goods  that  produced 
the  ten  units  were  worth,  in  the  first  case,  100  units  of 
consumption  goods,  they  would  be  worth  at  least  240 
units  of  consumption  goods,  when  the  return  on  them 
is  increased  to  24  units.  Production  goods  would  be 
worth  unit  for  unit  more  than  double  what  consump- 
1  See  Professor  Clark's  reasoning  on  page  330,  "  Distribution  of  Wealth." 


130  The  Theory  of  Prosperity 

tion  goods  are,  although  they  are  produced  by  the  same 
amount  of  labor.  Each  unit  of  capital  goods  must  be 
replaced  by  labor.  More  capital  goods  and  less  con- 
sumption goods  would  be  made,  if  the  price  of  the 
former  rose  while  that  of  the  latter  fell. 

The  additional  labor  can  be  applied  at  the  margin  of 
production,  or  it  can  be  used  to  create  additional  capital 
goods.  There  is  no  law  of  diminishing  returns  checking 
the  increase  of  capital  goods.  If  the  return  for  capital 
rose  above  the  ten  units,  the  additional  labor  would  be 
wholly  applied  to  its  production.  No  labor  would  be 
applied  at  the  margin  until  the  return  on  capital  fell 
again  to  ten  units.  If,  when  this  happens,  some  labor 
is  still  unemployed,  a  part  of  it  will  be  applied  at  the 
margin  and  the  rest  to  the  production  of  capital  goods. 
It  should  be  borne  in  mind  that  capital  and  labor  can 
be  partially  substituted  for  each  other.  An  increase  of 
capital,  other  conditions  remaining  unaltered,  leads  to 
the  substitution  of  some  capital  for  labor,  and  thus  tends 
to  reduce  wages.  An  increase  of  labor  will  likewise 
substitute  some  labor  for  capital,  and  thus  tend  to  re- 
duce interest.  After  the  quantity  of  labor  is  increased, 
the  equilibrium  is  not  restored  until  more  capital  is 
created.  After  an  increase  of  capital,  some  labor  is 
displaced  before  the  two  can  come  to  an  equilibrium. 
Under  static  conditions,  therefore,  a  fall  in  interest  or 
wages  results  in  a  fall  in  both.  The  losses  from  these 
two  funds  would  be  the  gain  of  the  holders  of  funded 
income.  If  additional  labor  applied  at  the  margin  of 
production  gives  decreasing  returns,  there  exists  some- 
where a  lack  of  the  power  of  substitution,  and  those 
owning  resources  where  this  power  fails  have  a  valuable 


Investments  1 3 1 

monopoly.  Diminishing  return  creates  an  income  that 
is  neither  wages  nor  interest.  The  failure  of  the  power 
of  substitution  here  or  elsewhere  does  not  prevent  a 
static  equilibrium.  A  society  with  no  other  material  for 
light  than  coal  oil  could  be  as  static  as  one  with  twenty 
substitutes  for  it.  On  the  contrary,  the  fewer  the  substi- 
tutes, the  easier  is  it  to  create  a  static  society. 

Interest  is  the  difference  between  the  value  of  capi- 
tal goods  and  those  fitted  for  immediate  consumption. 
Capital  or  future  goods  gradually  ripen  into  consumption 
goods,  and  as  they  do,  their  value  increases.  To  make 
interest  possible,  capital  goods  must  have  a  less  value 
than  consumption  goods.  Otherwise  the  increase  of 
their  value  upon  which  interest  depends  could  not  take 
place.  If,  then,  capital  goods  have  a  higher  value,  unit 
for  unit,  than  consumption  goods,  the  income  derived 
from  it  is  not  interest.  It  is  some  kind  of  funded 
income  and  must  be  rent  or  profit.  If  a  corporation 
has  capital  goods  that  as  consumption  goods  would  be 
valued  at  one  million  dollars,  and  they  acquire  a  value 
of  two  million  dollars  because  of  the  income  they  bring- 
to  the  corporation,  this  income  is  partly  rent.  Every 
corporation,  the  value  of  whose  stocks  and  bonds  is 
more  than  that  of  its  capital  goods,  has  funded  income. 
If  then  the  income  from  capital  increases  from  10  units 
to  24  units  through  an  increase  in  the  number  of  labor- 
ers, this  extra  income  is  not  interest.  It  is  a  funded 
income  and  a  sure  indication  of  some  monopoly.  The 
fact  that  capital  does  not  increase  shows  that  it  is  a 
monopoly,  or  that  some  disguised  limitation  exists  creat- 
ing a  value  in  other  objects.  The  most  slowly  increas- 
ing factors  in  distribution  are  monopolies,  and  their 


132  The  Theory  of  Prosperity 

income  belongs  to  the  monopoly  fund,  and  not  to  inter- 
est or  wages.  If  capital,  because  an  absolute  monopoly, 
cannot  increase,  its  income  is  no  longer  interest.  A 
static  equilibrium  does  not  remove  monopolies,  nor  can 
it  lower  the  high  price  of  goods  that  their  existence 
creates ;  nor  does  society  get  rid  of  funded  income 
by  becoming  static.  Its  amount  is  reduced  only  by 
dynamic  changes  enlarging  the  power  of  substitution. 
Every  increased  power  of  substitution  lowers  the  price 
of  the  articles  for  which  substitutes  are  created  and 
thus  reduces  the  amount  of  price-made  income.  The 
source  of  funded  income  is  a  low  margin  of  production. 
Only  dynamic  changes  raise  this  margin,  and  thus 
transform  funded  income  into  wages  and  interest. 
This  transformation  a  static  society  is  powerless  to 
make.  In  it  funded  income  is  fully  capitalized,  and 
thus  the  difference  between  it  and  capital  goods  is  lost 
sight  of.  But  the  difference  is  there,  and  the  income  is 
there,  no  matter  how  thoroughly  disguised.  Rent  does 
not  fall  off  except  as  wages  rise.  A  low  margin  of 
production  means  high  rents  in  any  society.  They 
tend  to  disappear,  not  as  Professor  Clark  assumes, 
in  a  static  state,  but  in  a  dynamic  society,  where  an 
enlarged  power  of  substitution  increases  the  marginal 
return.  In  a  static  society  rent  endures  as  a  part  of 
the  old  sources  of  income.  There  is  no  force  so  chang- 
ing prices  that  it  will  be  transformed  into  marginal  in- 
come. In  a  dynamic  society  the  older  forms  of  rent 
are  steadily  changed  into  wages  by  the  rise  of  the 
marginal  return.  Rent  persists,  but  it  is  derived  from 
new  sources  of  income  created  by  a  succession  of  inven- 
tions, discoveries,  and  improvements. 


*  Investments  133 

Ricardo  was  wrong  in  assuming  that  the  growth 
of  rent  is  at  the  expense  of  profits.  He  thought  that 
a  sum  of  wealth  was  taken  from  producers  equal  to  if 
not  greater  than  the  amount  landlords  gain  by  the 
increase  of  rent.  There  is  a.  partial  justification  of 
this  view  in  the  fact  that  profits  were  defined  so  as  to 
include  the  cost  of  risk.  Some  of  the  gains  of  land- 
lords might  be  from  the  funds  that  fortunate  producers 
enjoyed  because  they  escaped  the  cost  of  risk.  But 
this  fund  in  the  hands  of  lucky  producers  or  traders 
did  not  represent  a  net  gain  to  society.  There  was  an 
equal  loss  to  unlucky  traders,  who  paid  this  loss  out  of 
their  capital.  The  transfer  of  this  fund  to  landlords 
means  some  social  or  industrial  change  by  which  this 
risk  was  avoided.  The  fund  now  becomes  for  the  first 
time  a  net  addition  to  the  revenue  of  society.  It  is  one 
thing  to  say  that  this  new  revenue  of  the  landlord  is 
unearned ;  it  is  a  different  thing  to  say  that  some  one 
else  is  deprived  of  an  income  he  formerly  enjoyed. 
The  latter  fact  must  be  proved  before  rent  can  be 
regarded  as  a  species  of  exploitation.  Rent  is  a  cost- 
less income,  not  a  seized  income.  It  represents  some 
change  in  production  by  which  effort  is  reduced.  It  is 
the  part  of  the  net  gains  that  go  to  individuals  instead 
of  to  society.  It  is  nevertheless  a  social  gain  and  an 
index  of  increased  productivity. 

While  the  growth  of  funded  income  is  never  a  loss 
to  the  public,  one  form  of  rent  often  grows  at  the  ex- 
pense of  other  forms.  Every  change  in  prices  shifts 
from  one  class  to  others  the  part  of  the  social  surplus 
that  takes  the  form  of  rent.  If  the  expense  of  one 
price-making  unit  of  supply  falls  while  another  in- 


134  The   Theory  of  Prosperity 

creases,  there  is  no  net  addition  to  the  fund  of  rent. 
There  is  merely  a  transfer  of  wealth  without  a  social 
gain.  The  recent  fall  in  the  price  of  agricultural  prod- 
ucts released  a  large  part  of  the  rent  fund  going  to  the 
owners  of  land.  The  recent  growth  of  other  forms  of 
funded  income  is  largely  at  the  expense  of  farmers 
owning  their  own  land.  But  even  in  this  and  other 
similar  cases  there  is  a  net  gain  as  well  as  a  transfer 
of  wealth.  The  lowering  of  the  value  of  price-making 
units  of  supply  represents  some  increased  power  of 
substitution  on  the  part  of  consumers,  or  the  introduc- 
tion of  improved  processes  of  production.  The  transfer 
of  funded  income  goes  hand  in  hand  with  changes  that 
bring  large  social  gains.  It  can,  therefore,  be  inferred 
that  a  transfer  of  funded  income,  like  its  net  increase, 
is  an  index  of  prosperity.  The  public  properly  sympa- 
thizes with  the  losers,  but  it  does  wrong  to  regret  or  to 
prevent  the  change. 
Income  as  Changes  in  the  flow  of  income  are  always  due  to 

equalized  by  movements  in  prices.     The  marginal  unit  of  supply  de- 
Natural 
Law.  termines  the  expense  of  satisfying  each  want.     When 

its  price  is  determined,  each  other  unit  of  supply  yields 
a  rent  equal  to  the  decrease  in  expense.  Rent  is  always 
present  in  any  complex  society,  disguised,  however,  as 
a  funded  income  and  sold  on  the  investment  market  as 
though  it  were  interest  on  capital  goods.  All  invest- 
ments are  thus  capital  to  the  business  world.  The 
income  from  them  makes  up  the  interest  fund  standing 
in  direct  contrast  to  wages.  Viewed  in  this  way,  wages 
are  the  payment  for  concrete  days'  work,  which  can  be 
increased  or  decreased  only  by  changes  in  the  number 
of  laborers.  Interest  is  then  the  payment  for  an  ab- 


Investments  135 

stract  fund  of  capital  made  up  partly  of  capital  goods 
in  the  constant  process  of  replacement,  and  partly  of 
the  sources  of  funded  income  valued  at  the  current 
rates.  All  these  thrown  together  make  a  differential 
income  to  which  wages  are  marginal. 

Where  differential  and  marginal  income  can  be  con- 
trasted in  this  manner,  the  marginal  income  represents 
socialized  income.  Every  one  participates  equally  in  it, 
since  all  persons  can  fulfil  the  conditions  by  which  it 
is  secured.  Differential  income  is  unsocializcd,  or  at 
least  but  partially  socialized.  Either  many  persons  are 
excluded  from  it  entirely,  or  it  can  be  obtained  upon 
conditions  with  which  but  a  part  of  the  community  can 
comply.  There  is  thus  a  marked  contrast  in  these  two 
forms  of  income.  Where  the  various  means  of  produc- 
tion are  chosen  in  the  order  of  their  productivity,  the 
number  of  laborers  determine  how  many  of  them  will 
be  used.  The  least  productive  of  these  fixes  the 
marginal  wage.  All  extra  return  on  others  is  a  part  of 
the  interest  fund,  and  becomes  either  interest  on  capital 
goods  or  a  source  of  rent.  If  this  be  so,  changes  in 
wages  affect  the  size  of  the  interest  fund.  A  rising 
wage  prevents  the  use  of  the  least  productive  oppor- 
tunities for  labor,  and  cuts  down  the  difference  between 
the  best  and  the  poorest  opportunities.  The  interest 
fund,  being  a  differential  to  wages,  must  now  fall  off. 
It  must,  on  the  contrary,  grow  if  the  rate  of  wages  falls. 
The  difference  between  the  best  and  the  poorest  oppor- 
tunities for  labor  increases,  and  with  the  change  the  dif- 
ferential income  grows. 

Let  the  base  line  represent  the  number  of  days'  work, 
and  the  return  from  them  be  measured  by  the  distance 


136 


The  Theory  of  Prosperity 


between  it  and  the  line  dg.  Then  when  the  number 
of  days'  work  equals  the  line  ab,  the  area  abce  will 
represent  wages,  and  the  area  ccd  will  represent  the 
return  on  the  investments.  Increase  the  amount  of 
labor  to  ah  and  wages  equals  the  area  ahgf,  while 
the  interest  fund  grows  until  it  equals  the  area  fgd. 


Reverse  the  conditions  by  reducing  the  quantity  of 
labor,  or  improve  them  by  making  the  efficiency  of 
all  the  days'  work  more  nearly  equal,  and  the  interest 
fund  must  shrink  at  least  relatively  to  the  whole  income 
of  society. 

Accepting  these  well-known  facts,  investments  are 
socialized  by  any  change  raising  the  margin  of  pro- 
duction, and  income  is  desocialized  by  any  change 
lowering  the  margin.  Little  importance  attaches  to 
the  ownership  of  investments.  Their  real  significance 
comes  from  the  income  derived  from  them.  If  no 
income  went  to  the  owners  of  property,  it  would  be 
completely  socialized,  while  property  is  partially  social- 
ized by  every  reduction  in  its  total  income,  provided  no 
reduction  takes  place  in  the  total  product  of  industry. 
The  size  of  the  interest  fund  thus  fixes  the  amount  of 
desocialized  income,  and  this  in  turn  depends  upon  the 
amount  of  the  differential  income. 


Investments  137 

An  abstract  proposition  of  this  kind  has  little  mean- 
ing unless  transformed  into  concrete  form.  For  this 
purpose,  return  must  be  made  to  the  difference  between 
interest  on  capital  goods  and  funded  income  valued 
through  the  rate  of  interest.  These  two  united  and 
blended  make  the  differential  to  wages  called  the  inter- 
est fund.  It  is  paradoxical  to  say  that  the  interest  fund 
is  reduced  by  raising  the  rate  of  interest,  yet  the  state- 
ment contains  a  truth  hard  to  put  in  any  other  way. 
Funded  revenue  being  valued  through  the  rate  of  inter- 
est, a  rise  in  interest  reduces  the  value  of  investments 
depending  upon  it.  If  the  rate  of  interest  is  four  per 
cent,  an  interest  fund  of  forty  millions,  divided  equally 
between  interest  proper  and  rent,  gives  to  investments  a 
value  of  1000  millions.  There  would  be  500  millions  of 
capital  goods,  and  an  equal  amount  of  other  investments 
representing  funded  income.  If  the  rate  of  interest 
rose  to  five  per  cent,  the  500  millions  of  capital  goods 
would  retain  its  value,  but  other  investments  would 
fall  in  value  to  400  millions.  The  total  investments 
would  be  900  millions  instead  of  1000  millions  as 
before. 

Assume  further  that  the  change  in  the  rate  of  interest 
was  brought  about  by  the  pressure  of  a  rising  rate  of 
wages  forcing  up  the  margin  of  production.  This  new 
adjustment,  taking  a  part  of  the  funded  income  from  the 
interest  fund,  would  give  it  to  the  laborer  as  wages.  If 
5  millions  of  funded  revenue  was  thus  transferred,  the 
15  millions  remaining  would  be  valued  at  300  millions, 
reducing  the  total  value  of  investments  to  800  millions. 
It  does  not  follow,  therefore,  that  a  reduction  of  the 
interest  fund  means  a  fall  in  the  rate  of  interest.  The 


138 


The  Theory  of  Prosperity 


rate  may  go  up  while  the  amount  goes  down,  and  still 
the  sum  of  capital  goods  may  remain  unchanged.  In 
the  case  just  given,  5  millions  have  been  added  to  wages 
and  200  millions  of  investments  have  been  socialized. 
The  pressure  of  a  rising  rate  of  wages,  affecting  as  it 
does  the  margin  of  production,  falls  entirely  upon  the 
funded  income.  Capital  goods  still  get  their  old  return, 
and  may  even  get  more  than  before. 

The  process  can  go  on  indefinitely  in  a  progressive 
society.  The  only  limit  would  be  the  reduction  of  the 
interest  fund  until  it  contained  nothing  but  the  return 
on  capital  goods.  But  this  stage  would  also  involve 
the  socialization  of  interest.  Capital  goods  are  made 
and  replaced  by  labor.  If  there  is  no  obstacle  to  the 
flow  of  labor  to  capital  goods,  each  laborer  will  make 
his  share  of  capital  goods  and  thus  enjoy  the  income 
derived  from  them.  Interest  would  then  be  socialized 
in  the  sense  of  being  equally  distributed.  It  makes  no 
difference  what  income  is  called  when  all  share  alike 
in  its  distribution.  The  ownership  of  capital  is  unim- 
portant unless  it  disturbs  the  equal  flow  of  income  to 
all  who  participate  in  production.  No  one  would  allow 
another  to  have  a  permanent  income  from  capital  at  his 
expense,  when  by  making  certain  capital  goods  this  per- 
petual flow  of  income  would  be  his  to  enjoy.  Owner- 
ship under  these  conditions  would  mean  the  control  of 
industry  without  any  special  rights  to  income. 
^  This  ideal  result  is  partly  realized  in  every  progres- 
sive society.  Rent  is  due  to  the  high  cost  of  the  mar- 
ginal units  of  supply.  Every  increase  in  the  power  of 
substitution  cheapens  some  marginal  unit  or  puts  a  less 
costly  article  at  the  margin.  This  particular  rent  is 


Investments  139 

thus  reduced,  and  with  the  falling  off  of  funded  income 
due  to  it,  investments  are  cut  down  in  value  and  some, 
perhaps,  made  common  property.  Land,  franchises, 
corporate  rights,  and  other  intangible  property  serve 
merely  as  means  of  directing  industry  if  they  give  no 
net  income  to  their  owners.  In  recent  years  the  rec 
duced  value  of  agricultural  lands  has  shown  how  a  fall  I 
in  prices  can  socialize  property.  Land  is  now  as  well 
managed  as  before,  but  its  income  has  been  to  a  large 
extent  made  social  through  the  loss  of  peculiar  advan- 
tages formerly  enjoyed  by  its  owners.  Many  railroad 
corporations  through  the  fall  in  rates  give  no  income 
to  stockholders,  and  yet  they  are  kept  up  and  often 
well  managed.  The  increased  facilities  for  water  trans- 
portation will  socialize  the  income  of  many  more  rail- 
ways by  forcing  down  rates.  In  the  same  way  the  use 
of  electricity  on  street  railways  has  socialized  a  part  of 
the  income  formerly  going  as  rent  to  the  owners  of 
houses  near  the  centres  of  great  cities.  Large  rents 
are  now  obtained  on  sugar,  oil,  and  many  other  raw 
materials,  and  this  income  being  funded  increases  the 
amount  of  investments.  But  for  these  articles  substi- 
tutes will  sooner  or  later  be  found,  and  then  this  income 
will  be  socialized  just  as  land  rents  have  been. 

Rent  is  constantly  being  created  by  social  progress^ 
but  in  any  particular  form  it  is  steadily  being  cut  down 
by  the  increase  of  the  power  of  substitution.  The 
price  of  foods  in  England  was  on  an  upward  curve  for 
over  a  century  —  from  1757  to  1873.  So  long  did  this 
state  continue  that  the  rise  of  the  price  of  food  and  of 
the  rent  of  land  came  to  be  regarded  as  a  condition 
of  nature.  Many  a  theory  based  upon  these  supposed 


140  The  Theory  of  Prosperity 

facts  fell  to  the  ground  when  substitutes  for  the  staple 
English  foods  were  found.  So  will  it  be  with  predic- 
tions of  the  permanence  of  any  particular  form  of  rent. 
It  must  disappear  if  society  continues  progressive. 
Rents  like  profits  are  temporary.  The  difference  is  in 
the  length  of  time  that  rent  curves  persist  beyond 
similar  movements  in  profits.  The  power  of  substitu- 
tion acts  in  both  cases,  but  more  quickly  with  profits 
than  with  rent. 

All  differentials  then  are  rents.  A  low  margin  of 
production  means  high  rents.  A  rise  of  the  margin 
cuts  down  rents  and  socializes  the  income  formerly 
flowing  into  this  fund.  The  converse  is  equally  true. 
There  is  no  way  to  socialize  income  but  by  raising  the 
margin.  If  the  standard  of  life  is  low,  and  the  pro- 
ductive power  of  labor  is  small,  investments  are  large 
in  amount,  and  the  revenue  derived  from  them  gets  to 
the  public  only  through  special  qualities  not  possessed 
by  the  many.  There  is  a  public  for  investments,  but  it 
is  only  a  fraction  of  the  whole  people.  To  improve 
present  conditions  means  not  to  seize  funded  income  or 
to  transform  it  into  some  new  fund,  but  to  reduce  its 
amount.  An  increased  power  of  substitution  is  the 
only  remedy  for  an  unequal  distribution  of  wealth. 
This  may  come  slowly,  but  it  will  come,  and  with  it  will 
be  a  rising  margin  of  production  changing  rent  into 
wages.  In  the  solution  of  the  wages  problem  lies  the 
only  hope  of  eliminating  rent. 

A  summary.  It  is  now  possible  to  bring  the  contrasted  views  of 
production  into  more  coherent  relations  to  each  other. 
The  laborer's  viewpoint  pictures  the  simple  relations  of 
an  isolated  man  and  his  environment.  More  laborers 


Investments  141 

mean  more  contact  with  nature,  but  no  marked  change 
in  the  attitude  of  men  toward  it.  Each  workman  has 
an  equilibrium  to  maintain  in  which  his  return  cor- 
responds to  his  effort.  If  his  energy  can  be  conserved, 
there  is  a  perpetual  round  of  production.  Effort  makes 
goods ;  goods  create  utility ;  and  utilities  are  trans- 
formed back  into  energy.  The  goal  of  this  progress 
is  painless  effort  through  energy  that  is  again  and  again 
restored  by  its  reappearance  as  goods  and  utility. 

This  contrast,  however,  does  not  exist  with  a  capital- 
ist. He  deals  with  forces  and  with  material  which  is 
capital  and  is  capable  of  increase.  With  capital's 
increase  forces  are  better  utilized  or  the  less  costly 
is  substituted  for  the  more  costly.  These  forces  are 
of  two  kinds  —  labor  forces  and  natural  forces ;  the 
former  are  expensive,  the  latter  are  free.  There  is 
therefore  in  the  mind  of  the  capitalist  an  instinctive 
opposition  to  labor  costs,  which  in  his  opinion  are  the 
great  burden  on  industry.  Every  improvement  dis- 
pensing in  some  way  with  labor,  his  ideal  would  be 
realized  if  all  production  were  carried  on  by  natural 
forces.  The  capitalist  is  right  in  his  opposition  to  labor 
costs  and  in  his  desire  to  create  substitutes  for  labor. 
But  the  laborer  is  equally  right  in  demanding  high 
wages  and  an  equilibrium  between  effort  and  return. 
Both  these  views  are  in  essence  correct,  and  no  opposi- 
tion exists  between  them  if  they  are  worked  out  in 
detail.  Trouble  begins,  however,  when  an  attempt  is 
made  to  combine  them  into  one  point  of  view.  To 
harmonize  them  demands,  not  a  combination,  but  a  clear 
recognition  of  the  essential  features  that  each  viewpoint 
neglects  or  obscures. 


142  The   Theory  of  Prosperity 

These  viewpoints  are  not  radically  altered  by  the 
introduction  of  the  concept  of  marginal  return,  but  the 
terminology  by  which  they  are  described  becomes  so 
similar  that  it  is  easy  to  confuse  them.  Other  condi- 
tions of  production  remaining  the  same,  an  increase  in 
the  number  of  laborers  reduces  wages  by  lowering  the 
marginal  return.  Under  like  conditions  it  is  also  said 
that  an  increase  of  capital  reduces  interest  by  lowering 
the  marginal  return.  Where  then  are  wages  fixed  ? 
At  the  margin.  And  where  is  the  rate  of  interest 
fixed  ?  The  reply  is  also  at  the  margin.  It  is  then 
assumed  that  both  wages  and  interest  are  fixed  at  the 
margin,  and  that  the  marginal  return  equals  the  sum  of 
wages  and  interest. 

A  closer  examination,  however,  shows  that  these  two 
margins  are  not  the  same,  and  that  the  two  sums, 
wages  and  interest,  cannot  be  added  to  form  a  gross 
marginal  return.  The  laborer  strives  for  an  equilibrium 
between  effort  and  return.  This  return  is  in  the  form 
of  utilities,  and  the  more  goods  he  has  the  lower  is  their 
marginal  utility.  They  supply  wants  of  less  urgency, 
and  are  not  worth  producing  when  the  marginal  utility 
sinks  below  the  effort  of  production.  It  is  the  want 
margin,  therefore,  that  fixes  the  rate  of  wages.  The 
capitalist,  however,  has  to  do  with  forces  and  material, 
and  these  depend  upon  objective  relations.  His  margin 
of  production  is  the  place  where  the  fewest  goods 
will  be  produced  for  a  given  outlay.  Arrange  all  the 
opportunities  for  investment  in  a  series  so  that  the 
more  productive  come  first,  and  the  marginal  return 
in  goods  will  be  lowered  as  more  of  these  opportunities 
are  utilized.  The  margin  of  the  capitalist  is  the  goods 


Investments  143 

margin  and  thus  is  an  objective  fact,  not  subjective  rela- 
tion, as  is  the  want  margin  of  the  laborer. 

All  the  return  at  the  want  margin  can  go  to  the  la- 
borer at  the  same  time  that  all  at  the  goods  margin  goes 
to  capital.  The  defect  in  the  laborer's  viewpoint  is  due 
to  his  failure  to  recognize  the  difference  between  pres- 
ent and  future  goods.  Return  to  him  is  the  result 
of  effort,  and  is  measured  as  soon  as  the  effort  is  put 
forth.  This  means  that  he  thinks  of  return  in  terms 
of  future  goods,  and  his  margin  is  a  margin  of  these 
goods.  In  this  margin  the  capitalist  gets  no  share. 
His  share  comes  not  from  an  increase  of  goods,  but 
from  the  increase  in  the  value  of  certain  goods  that 
in  time  ripen  into  present  goods.  This  additional  utility 
going  to  the  capitalist  is  not  a  marginal  utility.  It  is 
a  differential  when  measured  by  the  marginal  want  of 
the  laborer  that  he  supplies  wholly  with  his  own  effort. 
At  the  laborer's  margin,  therefore,  he  gets  the  \vhole 
return.  The  capitalist  shares  only  in  the  additional 
utility  created  by  intenser  wants  and  complementary 
goods. 

At  the  goods  margin,  however,  —  the  place  where 
the  production  is  least  efficient,  —  all  the  return  goes 
to  capital.  When  viewed  as  abstract  fund,  capital  is 
capable  of  assuming  a  thousand  forms,  but  each  capital 
good  is  in  some  concrete  form  and  capable  of  but  one 
use.  At  a  given  moment  all  capital  is  concrete  goods, 
each  unit  of  which  has  a  particular  end.  Additional 
capital  is  always  more  of  these  concrete  goods  fitted 
for  some  definite  act  of  production.  The  marginal 
capital  is,  therefore,  concrete,  and  must  give  a  fixed 
return  on  itself  or  it  will  not  be  created  and  used.  The 


144  The  Theory  of  Prosperity 

concrete  margin  of  goods  production  must  yield  enough 
to  pay  the  rate  of  interest  on  the  capital  goods  used 
there,  but  in  the  case  of  both  labor  and  land  there  are 
no  concrete  units  at  this  margin.  Each  unit  of  land 
and  labor  has  several  uses.  Every  laborer  uses  many 
concrete  capital  goods,  and  on  each  acre  of  land  many 
kinds  of  tools  and  machinery  are  employed.  The  mar- 
ginal capital  good  has,  therefore,  in  conjunction  with  it, 
not  a  whole  laborer  nor  a  whole  acre,  but  merely  one 
use  of  a  laborer  and  one  use  of  some  land.  If  a  farmer 
puts  up  a  windmill  to  pump  water,  he  does  not  hire 
an  additional  laborer  to  manage  it,  but  makes  a  new 
use  of  some  laborer  he  already  has.  So  also,  if  he  buys 
a  new  cultivator  to  pulverize  the  soil,  he  does  not  em- 
ploy more  land ;  he  brings  out  new  uses  in  the  land 
he  has.  At  the  concrete  goods  margin  there  are  then 
capital  goods,  but  only  uses  of  men  and  land.  The  pro- 
cess of  increasing  capital  goods  continues  on  each  farm 
or  in  each  industry  until  the  marginal  return  only 
suffices  to  pay  for  the  additional  capital  used. 

Instead  of  the  increase  of  capital  bringing  labor  and 
land  toward  the  margin,  it  removes  them  farther  from 
it.  Only  a  part  of  the  new  capital  is  used  at  the  con- 
crete goods  margin.  Much  of  it  is  sunk  in  land  or 
used  to  elevate  men,  and  thus  augment  their  produc- 
tive power.  After  each  increase  of  capital  the  goods 
margin  is  somewhat  lowered,  and  along  with  the  change 
comes  a  lower  rate  of  interest.  But  land  and  men  are 
improved.  Each  acre  of  land  is  farther  from  the  mar- 
gin than  before.  Only  a  marginal  use  of  each  acre  is 
at  the  margin,  and  for  this  the  capitalist  pays  nothing. 
Each  individual  man  through  education,  increased  skill, 


Investments  145 

and  better  social  conditions  is  also  farther  from  the 
margin  than  before.  His  wages  are  fixed  by  intermar- 
ginal  efforts  because  they  determine  the  type  of  men  to 
be  employed.  An  increase  in  capital  not  only  adds 
somewhat  to  the  goods  used  at  the  margin,  but  also 
changes  the  form  of  the  intermarginal  capital.  Better 
tools  and  machinery  are  used,  and  to  tend  them  a 
superior  laborer  is  employed.  This  superior  man  can 
not  only  properly  tend  the  better  tools  and  machinery, 
but  he  can  also  tend  more  machinery.  He  can,  there- 
fore, be  employed  in  connection  with  the  marginal 
capital  with  no  more  cost  than  if  it  were  not  in  use. 
With  a  fixed  number  of  laborers  the  capitalist  will  ex- 
tend the  use  of  capital  so  long  as  the  whole  return  at 
the  margin  is  enough  to  meet  the  interest  charges. 

The  whole  of  the  subjective  wants  margin  goes  to  the 
laborer.  Interest  is  a  part  of  the  differential  utility 
created  by  intenser  wants  and  complementary  goods. 
The  whole  of  the  objective  goods  margin  at  the  same 
time  goes  to  capital.  The  laborer  is  paid  out  of  the 
added  return  which  human  efforts  give  to  the  forces 
and  materials  that  the  capitalist  controls.  Natural 
forces  and  material  are  free  goods  to  the  capitalist. 
He  uses  labor  only  when  it  gives  an  additional  return 
beyond  these  free  goods  equal  to  its  expense.  Wages 
are  a  differential  to  the  free  goods  created  by  natural 
forces  and  materials  open  alike  to  all  capitalists.  At  the 
wants  margin,  therefore,  wages  are  marginal  and  inter- 
est a  part  of  the  differential,  while  at  the  goods  margin 
interest  is  marginal  and  wages  a  part  of  the  differential. 
The  remainder  of  the  differential  in  each  case  is  the 
monopoly  fund.  It  is  a  factor  in  distribution  so  long  as 


146  The   Theory  of  Prosperity 

the  power  of  substitution  is  incomplete  and  prices 
fluctuate  so  that  there  is  a  market  problem  independent 
of  the  problems  of  value  and  production. 

It  is  proper  to  say  that  the  marginal  urgency  of 
human  wants  determines  the  rate  of  wages,  but  it  is  not 
correct  to  affirm  that  wages  are  fixed  at  the  concrete 
margin  of  goods  production.  On  the  contrary,  as  this 
concrete  margin  is  lowered  the  rate  of  wages  rises. 
With  each  fall  of  the  margin,  because  of  the  increase 
of  capital,  men  as  individuals  move  farther  from  the 
margin  and  get  more  wages.  Wages  go  up  through  the 
same  causes  that  lower  interest.  Any  movement  of 
capital  toward  the  margin  is  sure  to  transform  a  part 
of  it  into  forms  that  improve  and  develop  the  industrial 
qualities  of  laborers.  It  is  the  marginal  capital  that 
fixes  the  return  on  all  capital,  but  it  is  not  the  marginal 
laborer  that  fixes  the  wages  of  other  laborers.  Capital 
moves  toward  the  margin.  Labor  moves  from  the  mar- 
gin. Each  lower  class  of  labor  has  its  wages  fixed  by 
the  class  above  it.  The  strongest  of  each  class  tends 
to  move  into  the  class  above,  and  they  keep  the  wages 
of  each  class  near  enough  to  that  of  the  higher  class  to 
prevent  an  exodus  of  the  better  workmen.  It  is,  there- 
fore, the  maximum  productivity  of  workmen  that  deter- 
mines wages.  Whenever  a  new  maximum  is  set  by 
any  class  of  workers,  all  other  workmen  are  brought 
into  direct  relation  to  the  new  standard,  and  their  wages 
deviate  from  this  level  by  the  expense  and  trouble 
involved  in  the  transfer  from  other  classes  to  it. 

A  new  labor  level  raises  all  workmen,  just  as  a  new 
kind  of  agriculture  leads  to  the  improvement  of  all 
land.  The  best  workman  and  the  best  land  set  the 


Investments  147 

pace  for  all  men  and  land.  Changes  are  no  sooner 
introduced  than  modifications  of  skill  and  of  agriculture 
become  apparent  in  every  section  of  the  industrial 
world.  It  is  not  the  man  most  easily  dispensed  with, 
but  he  who  is  least  easily  dispensed  with,  that  fixes  the 
rate  of  wages.  It  is  also  the  best  land,  not  the  poorest 
land,  that  determines  the  value  of  land.  Each  workman 
tends  to  become  the  best  workman  and  each  acre  the 
best  acre.  If  the  transformation  does  not  take  place, 
the  difference  in  the  efficiency  of  men  and  of  land  is 
measured  by  the  obstacles  to  this  transformation,  and 
the  return  will  differ  accordingly.  Capital  will  make 
the  transformation  if  the  obstacle  is  not  greater  than  the 
value  of  the  capital  needed  to  remove  it. 

When  changes  in  production  come,  the  starting-point 
lies  in  the  increased  pressure  of  human  wants,  which 
acts  directly  on  the  laborer  in  the  increase  of  energy, 
and  indirectly  on  production  through  the  increase  of 
capital.  The  increased  energy  can  accomplish  more 
through  the  increase  of  capital  than  through  direct  con- 
tact with  nature,  where  so  often  the  law  of  diminishing 
returns  bars  effective  action.  Then  this  new  capital  is 
applied  to  the  improvement  of  men  and  land,  removing 
them  from  the  margin.  There  are  now  for  all  laborers 
an  increase  of  options  and  a  greater  power  of  substitu- 
tion. A  rise  in  wages  follows  these  changes.  It  is  the 

o  o 

last  link  in  the  series  of  changes  making  the  higher 
wages  an  effect  of  the  lower  margin  of  capital.  As  the 
differences  in  investments  wear  away,  the  return  on  all 
capital  sinks  to  the  level  of  the  marginal  capital,  but  as 
the  differences  in  men  and  land  disappear,  all  men 
become  equal  to  the  best  man  and  all  land  equal  to  the 


148  The   Tlieory  of  Prosperity 

best  acre.  There  can  be  no  other  static  equilibrium. 
So  long  as  some  men  or  land  are  not  at  their  maximum 
productivity,  capital  will  be  withdrawn  from  the  margin 
and  sunk  in  men  and  in  land.  Dynamic  changes  con- 
tinue until  the  return  on  all  capital  sinks  to  the  marginal 
level,  and  the  return  to  men  and  land  rises  to  its  maxi- 
mum. Labor  and  land  tend  toward  the  higher  level ; 
capital  toward  the  lower.  The  static  measure  of  pro- 
ductivity is  therefore  the  maximum  return  for  labor  and 
land  and  the  minimum  return  on  capital. 


PART    II 

INCOME  AS  DETERMINED  BY  HEREDITY 
A  STUDY  OF  DISCONTENT  AND  ITS  REMEDY 


CHAPTER   I 

INCOME  AS  FIXED  BY  STRUGGLE 

THE  restraints  of  which  people  are  conscious  are  Economic 
those  that  control  their  actions  or  such  as  deny  them 
participation  in  the  public  decisions.  A  man  wants 
citizenship,  choice  of  action,  and  the  right  to  control 
property,  and  these  being  acquired,  he  depends  upon 
his  individual  activity  for  the  satisfaction  of  his  desires. 
But  this  idea  of  freedom  is  not  fundamental,  for  the 
essential  pleasures  and  activities  being  economic,  make 
any  notion  of  freedom  futile  that  does  not  insure  the 
possibility  of  production  as  well  as  the  power  to  exist. 

Recognizing  these  facts,  many  writers  have  made  free 
land  the  one  essential  to  economic  freedom,  arguing 
that  coercion  is  impossible  if  each  individual  has  a  strip 
of  land  upon  which  to  labor.  He  can  be  enticed  into 
social  cooperation  only  by  offering  him  more  than  his 
land  produces.  Groups  of  such  men  have  a  safeguard 
against  usurpation  and  exploitation,  for  it  would  be 
possible  to  withdraw  from  a  productive  group  if  a  pro- 
portionate share  of  the  joint  product  was  refused.  In 
this  sense  free  land  is  not  a  simple  condition  but  the 
picture  of  conditions,  each  of  which  is  in  a  measure 
realized  in  primitive  societies.  The  holder  of  land  has 
opportunities  for  activity  and  is  insured  the  results  of 
his  own  productivity.  He  has  also  ways  in  which 
to  exert  himself  profitably,  and  his  faculties  are  stimu- 


152  The   Theory  of  Prosperity 

lated  by  the  variety  of  his  occupations.  The  results  of 
his  past  efforts  are  stored  up  to  enable  him  to  have 
leisure,  or  to  enjoy  sports  and  other  activities  that  his 
situation  affords.  Society  or  solitude  is  his  as  he  wants 
it,  and  there  are  no  indispensable  conditions  to  his 
existence  for  which  he  is  dependent  on  others. 

While  free  land  may  in  this  way  insure  economic 
freedom,  it  is  not  essential  to  it.  The  conditions  it 
creates  can  be  obtained  in  other  ways,  and  if  properly 
formulated  may  be  expressed  in  simpler  terms.  They 
are  in  fact  all  dependent  upon  a  single  condition  which 
can  be  realized  under  a  great  variety  of  circumstances. 
Men  on  free  land  may  lack  it,  and  men  without  any 
land  often  enjoy  economic  freedom  because  they  have 
it  Labor  is  free  where  there  is  a  complete  power  of  sub- 
stitution. It  is  the  doing  or  not  doing,  consuming  or 
not  consuming,  being  active  or  passive  at  will,  being 
social  or  not  social,  that  constitutes  freedom.  Eco- 
nomic freedom  is  secure  where  the  substitution  of  activi- 
ties and  enjoyments  is  possible.  If  a  workman  cannot 
withdraw  from  the  productive  group  of  which  he  is  a 
member,  he  is  not  free,  no  matter  what  his  income  is. 
He  must  have  the  right  to  cease  production  and  the 
power  to  enter  other  groups ;  nor  is  a  right  to  support 
necessary.  A  laborer's  own  productivity  can  secure 
a  store  from  which  he  may  subsist  while  not  at  work,  if 
his  liberty  of  action  has  not  been  previously  infringed ; 
nor  does  economic  freedom  demand  that  the  alternate 
occupations  shall  be  equally  profitable.  The  power  to 
secure  other  work  will  guard  his  income  so  long  as  it 
is  effective. 

In  consumption,   also,   the   power  of   substitution   is 


Income  as  Fixed  by  Struggle  153 

equally  necessary.  It  is  the  one  supreme  condition  to 
economic  freedom  involving  all  others,  and  no  individual 
can  maximize  his  pleasures  without  taking  it  into  ac- 
count. No  one  is  free  who  lives  on  one  food,  has  but 
one  form  of  amusement,  or  has  the  form  and  time  of  his 
leisure  set  for  him  by  his  situation  or  social  condition. 
The  sources  of  activity  lie  in  the  enjoyments  open  to 
men,  and  if  the  power  of  substituting  one  pleasure  for 
others  is  taken  away,  the  loss  of  liberty  is  as  complete 
as  if  the  freedom  of  action  were  denied.  The  greatest 
of  slaves  are  those  held  in  bondage  by  their  pleasures. 

So  long  as  this  power  is  complete,  groups  of  pro- 
ducers are  organized  in  a  natural  way,  and  each  work- 
man secures  the  full  product  of  his  labor.  He  can 
withdraw  from  a  group  if  it  offers  less  for  his  labor 
than  other  groups,  or  he  can  retire  from  production  if  the 
return  is  less  than  that  coming  from  non-economic 
activities.  A  freeman  enters  productive  groups  to 
increase  his  pleasures.  He  should  always  be  able  to 
withdraw  from  complex  forms  of  production,  and  put 
to  the  test  the  capacity  of  the  higher  civilization  to 
give  him  more  than  he  obtained  from  the  simpler 
primitive  state  where  a  condition  of  spontaneous  activity 
played  a  more  important  part.  Nations  pass  naturally 
from  the  less  to  the  more  complex  forms  of  production 
only  when  the  latter  give  the  greater  return,  their  prog- 
ress being  tested  by  the  relative  increase  in  produc- 
tivity, a  test  that  should  be  open  to  individuals.  There 
is  a  national  as  well  as  an  individual  loss  when  laborers 
work  so  long  in  a  direction  opposed  to  their  desire  that 
the  net  return  in  pleasure  is  reduced.  Economic  free- 
dom will  prevent  this  waste  and  keep  the  surplus  of 


154  The  Theory  of  Prosperity 

pleasure  at  its  maximum  ;  and  it  will  also  give  to  each 
individual  the  result  of  his  own  productivity  and  pre- 
vent any  aggression  or  usurpation  on  the  part  of 
individuals  or  of  productive  groups. 

The  group  can  always  test  the  productivity  of  any 
member  by  working  for  a  time  without  him,  thus  proving 
that  it  is  to  the  interest  of  the  group  to  give  each  mem- 
ber what  it  loses  by  his  absence.  No  one  can  secure 
more  than  this  amount  because  the  other  members  will 
in  this  case  refuse  to  work  with  him.  Each  laborer 
would  choose  that  opportunity  for  labor  where  the  surplus 
of  pleasure  was  greatest,  and  if  his  product  was  wanted, 
he  must  be  compensated,  not  only  for  his  costs,  but 
also  for  the  surplus  of  pleasure  which  the  possession 
of  the  commodity  brought.  If  twenty  units  of  pain 
would  produce  an  article  giving  forty  units  of  pleasure, 
a  free  laborer  would  not  part  with  it  unless  the  equiva- 
lent of  forty  units  of  pleasure  was  given  him.  Forty 
units  of  pleasure  would  have  forty  units  of  value,  no 
matter  how  little  it  cost  in  effort.  The  value  of  each 
article  would  be  measured  by  the  loss  of  pleasure 
which  its  production  caused  and  not  by  the  pains  of 
this  production,  and  thus  alternate  pleasures  would 
determine  each  other's  value. 

It  is  only  under  more  complex  social  conditions  that 
costs  enter  as  the  measure  of  values.  Men  must  lose 
their  economic  freedom  before  the  definite  relation  of 
costs  to  values  arises  that  is  characteristic  of  slave 
economies,  as  when  a  horse  is  fed  oats  and  worked  until 
the  energy  created  by  the  food  is  exerted  for  the  good 
of  its  master,  or  a  slave  is  put  under  the  lash  to  make 
him  render  a  full  equivalent  for  the  food  he  gets.  The 


Income  as  Fixed  by  Struggle  155 

same  condition  prevails  where  wages  are  just  sufficient 
to  keep  the  workman  alive,  forcing  him  to  work  from 
necessity  and  not  from  choice.  Necessity  is  the 
measure  of  his  return,  and  this  is  secured  when  costs 
and  pleasures  are  equal.  Costs  therefore  mark  the  lower 
limit  of  values  and  become  a  standard  when  the  exploita- 
tion of  laborers  is  so  great  that  they  would  be  crushed 
out  of  existence  without  some  material  check  to  its 
pressure.  Even  here  values  can  be  measured  in  pleas- 
ures, and  under  all  other  circumstances  they  must  be. 
Freemen  compare  pleasures ;  only  the  product  of 
inferiors  is  estimated  in  terms  of  pain. 

Under  the  conditions  stated,  a  simple  society  of  free-  Exploi- 
men  would  grow  up  with  the  activity  of  each  person  tatlon> 
determined  by  his  own  productivity  and  the  nature  of 
his  interests.  As  the  complexity  of  the  social  organiza- 
tion increased,  rules  and  customs  in  the  interest  of  all 
would  grow  up  naturally.  The  egoistic  interests  of  each 
member  of  the  community  being  in  harmony  with  social 
order,  and  impelling  an  obedience  to  all  regulations  that 
furthered  the  public  welfare,  other  supports  of  morality 
would  prove  unnecessary,  for  self-interest  would  be 
synonymous  with  public  good. 

In  spite  of  these  tendencies  to  create  and  perpetuate 
a  simple  society,  it  is  doubtful  if  such  a  society  in  any 
developed  form  ever  existed,  for  even  in  the  earliest 
communities  there  were  forms  of  usurpation  and  oppres- 
sion, showing  the  existence  of  some  counteracting  forces 
that  the  previous  reasoning  has  not  recognized.  The 
lack  of  economic  freedom  shows  itself  in  a  condition  of 
exploitation,  in  which  the  power  of  substitution  is  cur- 
tailed or  destroyed,  with  the  result  that  the  exploited 


1 56  The   Theory  of  Prosperity 

get  less  than  they  produce,  while  the  exploiters  get  a 
corresponding  degree  more  than  their  productivity. 

The  source  of  this  exploitation  is  usually  found  in  the 
power,  energy,  and  intelligence  of  the  dominant  class, 
which,  we  are  told,  profits  by  the  grinding  down  of  the 
weak  and  helpless  to  a  condition  of  poverty,  rendering 
them  unable  to  withstand  the  aggression  of  their  supe- 
riors, the  exploiters,  who  hold  the  political  power  and 
use  it  for  their  own  ends.  It  is  claimed,  therefore, 
that  there  is  no  hope  of  economic  freedom  until  the 
power  of  the  ruling  class  is  curtailed  and  the  doctrine 
of  political  equality  asserted ;  and  to  cover  the  weak- 
nesses of  this  argument,  the  source  of  exploitation  is 
also  said  to  be  found  in  property  differences,  the  lack 
of  capital  disabling  laborers  in  conflict  with  their  em- 
ployers, and  compelling  them  to  accept  a  minimum 
wage  barely  sufficient  to  sustain  life. 

These  and  similar  explanations  are  plausible  so  long 
as  the  attention  is  centred  on  the  motives  and  actions 
of  the  exploiters ;  but  why  does  the  exploited  consent 
to  the  exploitation  ?  This  question  increases  in  diffi- 
culty when  we  recall  the  fact  that  the  number  of  the 
exploited  is  much  greater  than  that  of  their  oppressors. 
Two  men  might  compel  one  man  to  work  for  them,  but 
even  then  it  would  probably  be  more  for  their  interest 
to  work  for  themselves,  as  their  own  productivity  would 
.be  greater  than  that  of  their  slave.  But  granting  that 
they  would  prefer  ruling  to  working  in  this  case,  it  is 
not  typical  of  the  common  forms  of  exploitation. 

Not  among  laborers  only  is  the  phenomenon  mani- 
fest, but  among  all  classes  of  society,  for  everywhere 
people  are  working  for  the  continuation  of  social  con- 


Income  as  Fixed  by  Struggle  157 

ditions  that  deny  them  the  full  return  of  their  labor. 
A  typical  example  is  the  case  of  women,  who,  as  a  rule, 
not  only  get  less  than  their  full  productivity,  but  are 
ardent  opponents  of  the  very  changes  by  which  the 
return  for  their  labor  would  be  secured.  When  we 
reflect  also  upon  the  fact  that  opposition  to  economic 
independence  and  equality  is  not  confined  to  the  lower 
classes,  where  it  might  be  expected,  but  is  characteristic 
of  those  who  have  adequate  power  to  make  all  desired 
changes,  we  realize  that  the  phenomenon  is  too  general 
to  be  explained  by  the  greed  of  oppressors. 

An  egoistic  society  could  be  maintained  if  primitive 
men  always  remained  in  the  same  environment  and 
were  not  subjected  to  outside  influences.  At  least  it  is 
in  such  societies  that  these  tendencies  come  out  most 
clearly  and  continue  for  the  longest  time.  Isolated 
communities  and  mountainous  regions  difficult  of  access 
furnish  the  best  example  of  societies  moved  mainly 
by  egoistic  principles.  Such  societies  usually  break 
down  or  are  transformed  into  different  societies  as 
soon  as  the  isolation  ceases  or  new  ways  and  goods 
are  introduced.  This  inductive  proof  that  simple 
societies  are  due  to  the  continuation  of  the  same 
environmental  conditions  is  strengthened  by  deductive 
proof  as  soon  as  the  nature  of  environments  and  the 
effects  of  changes  are  investigated.  In  a  simple  envi- 
ronment a  system  of  morality  grows  up  that  helps  the 
inhabitants  to  adjust  themselves  more  fully  to  it.  I  use 
the  term  morality  in  the  broad  sense  of  earlier  usage, 
including  all  customs,  traditions,  habits,  laws,  and  insti- 
tutions created  by  men  for  their  mutual  advantage,  the 
reacting  influence  being  moral  as  contrasted  with  purely 


158  The  Theory  of  Prosperity 

physical  agencies.  In  morals,  then,  are  included  all  use- 
ful rules  and  regulations  that  help  men  in  increasing 
their  pleasures  and  in  lessening  their  pains;  all  adjuncts 
to  the  process  of  maximizing  pleasures.  The  more 
moral  the  community  the  greater  is  the  harmony  between 
it  and  those  external  forces  upon  which  welfare  and  sur- 
vival depend.  Thus  egoistic  tendencies  force  men  and 
societies  to  become  moral,  and  in  a  simple  long-enduring 
environment  there  would  grow  up  laws,  habits,  and  tra- 
ditions, by  means  of  which  the  well-being  of  men  is  kept 
at  its  maximum.  When,  however,  this  community 
changes  its  environment,  it  is  in  an  anomalous  position. 
It  has  a  code  of  rules  created  by  one  environment  and 
a  group  of  needs  and  activities  prompted  by  another, 
with  the  result  that  the  forces  of  the  two  environments 
are  not  in  harmony.  The  traditional  code  of  the  first 
environment  impels  the  people  to  act  as  though  they 
were  still  in  it,  while  the  new  wants  and  motives  in  har- 
mony with  the  second  environment  demand  for  their  full 
utilization  actions  and  conduct  that  in  the  old  environ- 
ment were  plainly  injurious  and  hence  immoral.  If  the 
traditions  of  a  nation  could  be  readily  changed,  this  diffi- 
culty would  disappear,  as  a  new  code  would  be  created 
in  harmony  with  new  conditions,  through  which  an 
adjustment  to  the  new  environment  would  be  worked 
out.  But  there  are  powerful  obstacles  to  these  changes  ; 
the  various  parts  of  a  traditional  code  depend  for  their 
vitality  not  merely  on  egoistic  motives  but  also  on  psy- 
chic and  physiological  principles.  Imitation  is  quite  as 
powerful  in  the  continuation  of  habits  and  customs  as 
are  the  original  motives  creating  them,  for  men  do 
readily  and  easily  what  they  are  accustomed  to  do. 


Income  as  Fixed  by  Struggle  159 

When  habits  are  formed,  succeeding  generations  con- 
tinue them  with  little  examination  into  their  causes  and 
purposes.  Motor  reactions  are  created  impelling  people 
to  follow  in  the  activities  of  their  ancestors,  and  these 
motor  tendencies  continue  after  the  situation  is  so 
changed  that  other  forms  of  activity  are  more  advanta- 
geous. Particular  kinds  of  food,  clothing,  and  climate 
make  physiological  modifications  in  the  inhabitants  of  a 
region  so  that  they  are  adjusted  to  these  conditions  and 
suffer  severely  if  they  are  compelled  to  change  their 
location,  seek  new  food,  and  encounter  new  difficulties. 
Each  new  situation  thus  forces  men  to  cease  certain 
habitual  imitations,  to  discontinue  certain  motor  reac- 
tions, to  stop  using  certain  foods,  and  to  make  other 
changes  out  of  harmony  with  their  psychic  and  physio- 
logical impulses,  thus  continuing  an  everlasting  strug- 
gle between  men's  egoistic  motives  and  their  acquired 
psychic  tendencies. 

It  is  this  state  of  affairs  that  makes  the  social  forces 
in  a  second  environment  different  from  what  they  were 
in  the  first  environment  to  which  a  race  became  adjusted. 
Simple  egoistic  tendencies  would  create  the  original 
adjustment  and  the  code  of  morals  that  resulted  from 
it.  But  in  the  second  environment  the  imitations,  motor 
reactions,  and  physiological  changes  resulting  from  the 
first  adjustment  interfere  with  the  free  play  of  the 
egoistic  forces  of  the  second  environment.  Each  new 
environment  would  naturally  create  a  new  morality  fit- 
ting new  conditions.  Now,  if  environments  and  codes 
of  morality  began  and  ceased  together,  that  is,  if  the 
duration  of  environments  and  codes  of  morality  were 
the  same,  the  egoistic  forces  of  each  epoch  would  have 


160  77/i?   Theory  of  Prosperity 

free  play,  and  simple  economies  would  prevail  even  in 
the  most  complex  civilization.  But  environments  fol- 
low one  another  rapidly,  while  moral  codes  are  modified 
with  difficulty.  There  are  no  forces  to  keep  men  in  an 
old  environment  if  their  interests  impel  them  to  leave 
it,  while  the  same  interests  cannot  force  men  as  readily 
to  set  aside  a  code  of  morality  which  certain  psychic  and 
physiological  forces  keep  in  its  place.  Environments, 
therefore,  change  more  easily  and  have  less  duration 
than  the  moral  codes  they  create.  The  social  phe- 
nomena of  societies  that  have  passed  through  many 
environments  are,  therefore,  different  from  those  of 
simple  societies  created  by  early  conditions. 

As  can  be  seen,  these  facts  have  important  effects  on 
the  mental  attitude  and  productivity  of  men.  They  be- 
come satisfied  with  the  environment,  to  which  they  have 
become  adjusted,  and,  pleased  with  their  traditions  and 
institutions,  they  adopt  an  optimistic  attitude  toward 
everything  essential  to  their  present  welfare.  If  in  any 
way  they  are  in  touch  with  an  outside  environment  better 
than  their  own,  they  acquire  a  dislike  for  those  goods, 
habits,  and  modes  of  living  not  in  harmony  with  their 
own  regions.  Further,  each  region  loses  by  death  or 
migration  those  not  suited  with  its  conditions,  and  thus 
the  traditions  and  customs  of  the  region  not  only  make 
men  pleased  with  what  they  have,  but  make  them  dis- 
like what  they  do  not  have. 

These  inclinations  and  prejudices  are  useful  so  long 
as  the  environment  continues.  But  when  the  race 
moves  to  a  better  region  or  the  locality  is  improved  by 
the  introduction  of  new  methods  of  production,  the 
people  have  a  distaste  for  the  pleasures  and  activities 


Income  as  Fixed  by  Struggle  161 

that  the  new  conditions  favor.  They  strive  to  continue 
the  conditions  and  mental  attitude  of  the  old  environ- 
ment, and  aided  by  tradition  and  the  psychic  reactions  it 
has  created,  they  live  on  in  the  new  environment  with- 
out the  changes  that  their  egoistic  interests  prompt. 
More  is  produced  than  the  habits  of  the  community 
permit  it  to  enjoy,  and  so  in  order  to  prevent  waste  a 
more  complex  form  of  society  is  superimposed. 

These,  then,  are  the  social  conditions  favorable  to  ex- 
ploitation. One  class  has  more  than  it  wants  or  at  least 
more  than  its  social  customs  and  traditions  permit  its 
members  to  enjoy.  The  extra  productivity  of  the  new 
environment  is  not  regarded  as  a  benefit,  for  it  tends  to 
break  down  inherited  customs  and  to  introduce  extrava- 
gance, luxury,  and  dissipation.  The  moral  tone  of  the 
community  is  opposed  to  this  extra  productivity,  and  its 
exponents  strive  to  force  the  nation  back  into  the  old 
conditions  with  reduced  productivity,  or  they  suggest 
means  of  expending  this  extra  income  in  ways  not  op- 
posed to  established  usages.  Such  a  nation  offers  an 
alluring  object  for  conquerors,  who  appropriate  this 
new  surplus  without  encountering  much  opposition 
from  the  conquered,  for  they  do  the  community  a  ser- 
vice in  maintaining  the  old  morality ;  while  the  con- 
quered remain  satisfied,  or  at  least  passive,  so  long  as 
the  oppression  of  their  rulers  does  not  reduce  their  eco- 
nomic welfare  below  the  limit  insured  them  under  the 
old  conditions. 

The  motives  and  conditions  bringing  races  into  con- 
tact with  one  another  and  creating  mixed  societies  are 
complex  and  in  many  cases  difficult  to  trace.  I  am 
seeking  not  for  them,  but  for  the  causes  explaining 


1 62  The  Theory  of  Prosperity 

the  voluntary  subjection  of  conquered  races.  If  exploi- 
tation did  not  come  naturally,  it  could  not  come  at  all, 
or  at  least  it  could  not  continue  for  any  length  of  time. 
But  when  certain  forces  work  to  prevent  a  people  from 
enjoying  the  full  return  for  their  labor,  these  forces  sup- 
plement the  interests  of  conquerors  and  help  to  create 
social  conditions  promoting  exploitation.  Early  systems 
of  morality  inculcate  a  spirit  of  resignation  and  asceti- 
cism, and  create  an  optimistic  tone  that  makes  present  ills 
bearable.  Certain  doctrines,  such  as  that  new  forms  of 
consumption  are  luxuries  and  indulgence  in  them  is  not 
only  immoral  but  sinful,  help  to  adjust  a  people  to  an 
environment,  and  become  the  necessary  means  of  mak- 
ing them  content  with  a  bad  situation.  Primitive  races 
could  not  exist  without  such  doctrines,  but  when  a  better 
environment  is  entered,  they  are  checks  to  its  full  enjoy- 
ment, and  are  ready  means  of  fastening  upon  a  nation  a 
dominant  class  which  consumes  the  extra  produce  re- 
jected by  the  moral  code  of  the  subject  class. 

Exploitation  is  thus  not  a  phenomenon  of  retrogres- 
sion, but  of  progress.  It  is  the  natural  consequence  of  a 
movement  from  a  poorer  to  a  better  environment  during 
the  period  when  the  free  play  of  egoistic  forces  is  pre- 
vented by  the  code  that  helped  the  people  in  their  adjust- 
ment to  the  earlier  environment.  The  real  source 
of  exploitation  lies  not  in  political  causes  nor  in  com- 
petition, but  in  old  traditions,  habits,  and  prejudices. 
Had  not  antecedent  conditions  created  contentment  in 
bad  environments,  exploitation  would  be  impossible  in 
better  situations.  Political  power  may  continue  what 
tradition  has  created,  but  it  cannot  take  more  from  a 
subject  race  than  the  new  environment  adds  to  their  pro- 


Income  as  Fixed  by  Struggle  163 

cluctive  power.  The  causes  of  exploitation  antedated 
the  conquest  and  are  not  even  strengthened  by  it.  In  a 
primitive  society,  for  example,  a  band  of  roving  men 
could  capture  and  hold  wives  secured  from  neighboring 
tribes ;  but  this  fact  does  not  account  for  the  ready 
manner  in  which  women  submit  to  exploitation ;  for  if 
they  in  the  earlier  social  state  had  not  been  accustomed 
to  self-sacrifice,  their  opposition  to  their  new  condition 
would  have  prevented  the  new  form  of  society  from 
becoming  permanent.  The  needs  of  children  developed 
self-denial  in  the  earlier  state  in  which  women  were  free. 
It  was,  therefore,  the  ideas  and  habits  of  women,  and  not 
the  power  of  men,  that  induced  them  to  accept  the  new 
situation,  gave  to  men  the  increased  productivity  arising 
from  the  new  social  state,  and  helped  to  perpetuate 
psychic  reactions  and  physical  peculiarities  that  the  new 
conditions  could  not  have  formed  of  themselves. 

For  each  animal,  man,  or  society  the  environment  is  Adhesive 
not  all  nature  but  a  definite  group  of  objects,  the  pres-  adJustment- 
ence  or  absence  of  which  affects  the  immediate  welfare. 
Adjustment  then  means  the  utilization  of  a  few  concrete 
objects  upon  which  survival  depends.  Each  plant  can 
exist  only  in  particular  soils  ;  insects  die  if  deprived  of 
peculiar  sorts  of  food ;  a  cow  needs  food,  but  it  must  be 
in  the  form  of  grass ;  the  lion,  the  polar  bear,  and  the 
bison  thrive  only  in  regions  with  peculiar  climate;  men, 
too,  at  given  stages  of  progress  demand  particular  kinds 
of  food,  need  certain  forms  of  shelter,  and  are  confined 
to  places  with  given  climates.  Food,  clothing,  shelter, 
and  other  necessities  are  derived  from  the  present  sur- 
roundings of  men,  and  their  activities  must  be  directed 
to  their  acquisition.  Through  these  goods  happiness  is 


164  The   TJicory  of  Prosperity 

attained  and  evils  warded  off.  Adjustment  under  these 
conditions  becomes  a  process  of  getting  goods  or  of 
avoiding  evils.  Certain  foods  and  other  conditions  of 
welfare  become  so  essential  that  men  narrow  their  ac- 
tivities to  get  them.  When  a  struggle  begins  for  their 
possession,  the  increased  adjustment  to  the  general  con- 
ditions of  nature  is  lost  sight  of,  and  survival  depending 
on  the  acquisition  of  local  goods,  traits  are  developed 
that  aid  in  the  appropriation  of  these  articles  or  places ; 
and  those  customs  and  habits  become  necessary  that 
help  men  to  make  better  use  of  local  goods.  For  each 
habit  and  custom  there  is  an  environmental  cause, 
the  supremacy  of  which  compels  men  to  act  in  harmony 
with  its  demands.  Independent,  self-prompted  activity 
creates  a  breach  between  the  individual  and  the  local 
sources  of  his  food  and  other  necessities,  making  him 
liable  to  the  danger  of  displacement  by  those  who  ad- 
here more  closely  to  local  conditions. 

In  each  isolated  region  men  survive  by  the  very  close- 
ness of  their  touch  with  nature,  because  for  each  local 
peculiarity  some  mode  of  action  is  devised  by  which  its 
good  is  secured  or  its  evil  avoided.  Men  in  this  stage 
of  development  have  a  peculiar  fondness  for  rules  of 
thumb  which  meet  the  requirements  of  the  field  of 
observation,  no  generalization  being  carried  farther 
than  individual  verification  makes  possible.  A  multi- 
tude of  these  local  rules  grow  up,  hemming  in  the  ac- 
tivity of  men  and  shaping  it  to  the  needs  of  the 
locality;  rules  which  solidify  into  traditions  that  are 
hard  to  break  from  and  which  hold  each  person  to  the 
region  in  which  he  was  born.  If,  however,  compelled 
by  stress  of  circumstances  to  leave  home,  he  settles 


Income  as  Fixed  by  Struggle  165 

in  some  new  region  and  localizes  himself  as  completely 
as  before.  In  this  way  men  have  gradually  wandered 
over  all  the  earth,  never  rising  in  thought  above  the 
essentials  of  existence.  They  may  become  keen  ob- 
servers, but  always  lack  the  power  of  generalization 
which  would  free  them  from  the  tyranny  of  local 
conditions. 

This  adhesive  adjustment  must  have  existed  many 
ages  to  have  produced  the  mental  traits  that  have  per- 
sisted so  long  and  from  which  most  races  have  not  been 
able  to  depart ;  but  closely  following  or  perhaps  coinci- 
dent with  it  is  another  form  of  adjustment,  through 
which  men  form  themselves  into  groups  by  which  ob- 
stacles are  surmounted,  protection  is  secured,  or  goods 
are  increased.  Families,  tribes,  clans,  and  nations  are 
formed,  and  the  motives  developed  by  which  they  are 
held  together.  All  social  organizations  are  parts  of 
a  cohesive  adjustment;  the  church,  the  school,  the 
army,  the  club,  the  trades  union,  —  all  get  their  force 
and  their  utility  from  the  social  bonds  existing  among 
their  members.  The  cohering  group  has  many  advan- 
tages over  isolated  individuals,  and  can  thus  control 
favored  localities,  or  reach  out  farther  in  search  of  food 
without  breaking  home  connections. 

There  must  have  been  ages  of  a  fortuitous  adjustment 
when  merely  accidental  circumstances  determined  sur- 
vival ;  ages  in  which  men  lived  on  what  they  found,  and 
moved  from  place  to  place  to  secure  the  irregular  sup- 
plies of  food  furnished  by  chance.  The  fickleness  of 
character,  the  arbitrariness  of  notions,  and  the  love  of 
gambling  and  change,  so  commonly  found  even  in  civil- 
ized men,  are  abiding  marks  of  this  stage.  An  adhesive 


1 66  The  Theory  of  Prosperity 

adjustment  follows  this,  or  at  least  arises  from  condi- 
tions much  more  stable,  such  as  a  local  food  supply  of  a 
kind  capable  of  preservation.  Definite  settlements  are 
then  possible,  and  with  them  begins  the  growth  of  that 
inclination  to  cling  to  soil  and  place  that  accounts  for 
the  characteristics  of  an  adhesive  adjustment. 

Of  this  stage  history  gives  us  but  an  incomplete 
account,  as  the  people  belonging  to  it  did  not  write 
histories ;  nor  is  their  life  made  up  of  striking  events, 
as  is  the  case  with  the  struggles  and  conquests  incident 
to  a  cohesive  adjustment.  It  was  probably  at  its  best 
just  before  the  dawn  of  history,  when  the  desirable  parts 
of  the  world  were  filled  with  closely  aggregated  but 
slightly  connected  groups  of  individuals,  at  a  time  when 
tradition  and  imitation  were  at  their  maximum ;  a  time 
when  it  was  not  likely  that  such  disturbing  elements  as 
the  struggles  and  dominance  of  cohering  nations  were 
introduced.  Illustrations  of  adhesive  adjustment  are 
furnished  by  the  village  communities  of  India  and  China, 
where  the  earlier  conditions  seem  to  have  continued 
with  scarcely  any  modification ;  but  in  all  civilizations 
remnants  of  this  stage  exist,  and  from  the  conditions  it 
gave  rise  to  come  many  of  the  popular  ideals  of  the  pres- 
ent time.  The  independent  farmer,  the  mountaineer, 
the  peasant  proprietor,  the  small  trader,  the  free  artisan, 
and  other  types  of  isolated  producers  have  the  dominant 
traits  of  an  adhesive  adjustment.  From  Aristotle  to 
the  present  time  these  types  have  been  idealized.  The 
freedom  and  independence  of  adhesion  have  been  placed 
above  the  efficiency,  energy,  and  comfort  of  cohesion. 
Cohesive  An  adhesive  adjustment  is  concrete,  and  puts  each 

morality.        person  in  direct  relation  to  the  local  situation  upon  which 


Income  as  Fixed  by  Struggle  167 

his  happiness  depends,  and  from  which  his  pains  arise. 
He  needs  or  must  avoid  particular  objects,  and  the  hav- 
ing or  avoiding  these  determines  his  welfare.  Adhesive 
morality  thus  consists  of  rules  derived  by  observation 
from  this  local  environment,  where  each  necessary  ob- 
ject is  the  source  of  one  or  more  rules  of  thumb  that 
become  embodied  in  local  customs.  Actions  suited  to 
them  become  fixed  as  habits  which  through  imitation 
descend  from  generation  to  generation.  Selfishness  is 
a  product  of  these  conditions.  Where  the  environment 
affords  but  a  bare  living,  the  individual  energy  can  be 
sustained  in  no  other  way,  for  each  individual  must  have 
a  certain  amount  of  nutriment  to  enable  him  to  live. 
There  are  fixed  limits  above  and  below  which  the 
amount  of  food  cannot  vary  without  so  serious  an  injury 
to  the  individual  that  his  power  of  survival  is  impaired. 
Under-nutrition  causes  starvation,  leads  to  disease,  inten- 
sifies struggle,  and  forces  to  the  wall  those  whose  effi- 
ciency is  too  slight  to  cope  with  existing  competition. 
It  acts,  therefore,  as  an  elevating  force  by  cutting  off 
the  less  productive  part  of  each  struggling  community. 
Over-nutrition  has  equally  important  effects,  for  persons 
who  indulge  too  freely  lower  their  vitality  and  become 
subject  to  peculiar  diseases  and  vices.  Dissipation  and 
over-indulgence  are  as  potent  in  cutting  off  the  more 
productive  class  as  under-nutrition  is  effective  in  cutting 
off  the  less  efficient.  There  is  thus  a  natural  force  cut- 
ting into  society  from  above  as  well  as  one  cutting  in 
from  below,  subjecting  both  the  strong  and  the  weak, 
the  rich  and  the  poor,  to  peculiar  difficulties  from  which 
the  normal  person  is  practically  exempt. 

It  should  be  noticed  that  the  path  of  progress  lies 


1 68  The  Theory  of  Prosperity 

along  the  line  of  complete  nutrition ;  each  person  must 
reach  this  line  in  order  to  live,  but  all  who  cross  it  are 
eliminated  by  dissipation  and  degeneration.  The  only 
road  to  progress,  therefore,  lies  through  such  modifica- 
tions of  the  consumption  of  individuals  as  to  render 
their  fullest  endeavors  just  sufficient  to  secure  complete 
nutrition.  Each  change  in  the  productive  power  must 
be  accompanied  by  a  corresponding  change  in  consump- 
tion, or  the  field  of  under-nutrition  or  over-nutrition  is 
entered.  To  such  a  state  of  things  there  is  but  one 
outlet — and  that  outlet  is  vicarious  consumption;  in 
other  words,  if  a  man  gets  pleasure  in  the  welfare 
of  others  and  seeks  in  this  direction  an  outlet  for  his 
surplus  energy,  he  avoids  both  over-nutrition  and  under- 
nutrition.  In  competition  with  others  he  survives  be- 
cause of  his  greater  energy,  while  in  the  consumption  of 
what  he  has  produced,  he  is  saved  by  his  greater  altru- 
ism. A  man  becomes  normal  to  these  new  conditions 
only  by  doing  more  for  his  companions  and  using  his 
energy  in  their  behalf.  Surplus  energy  thus  finds  a 
social  outlet,  and  is  the  base  upon  which  social  relations 
rest.  If  productive  power  is  increased,  external  inter- 
est must  grow,  or  the  individual  ceases  to  be  normal 
and  becomes  liable  to  displacement  through  dissipation. 
Altruism  is  thus  the  complement  to  increased  productiv- 
ity and  must  grow  as  energy  and  vitality  increase. 

To  put  this  truth  in  a  reverse  form,  each  increase 
of  altruism  leads  to  some  form  of  asceticism,  by  which 
individual  wants  are  reduced  and  simplified,  or  to  a 
greater  display  of  energy  through  which  the  goods 
needed  for  the  welfare  of  others  may  be  supplied.  In 
early  societies,  with  harsh  external  conditions,  social 


Income  as  Fixed  by  Struggle  169 

progress  thus  depended  on  asceticism,  on  which  stress 
was  laid  in  all  early  moral  codes  because  in  this  way  most 
of  the  surplus  was  obtained.  In  later  times,  where  the 
environing  conditions  have  become  more  favorable,  men 
seek  through  an  increase  of  energy  to  secure  the  funds 
needed  to  supply  their  unselfish  impulses.  The  growth 
of  temperance,  public  libraries,  good  roads,  concerts, 
and  art  galleries  are  signs  of  the  pressure  which  inex- 
clusive  consumption  is  exerting  on  all  men  who  remain 
normal  under  the  better  conditions  of  modern  societies. 
It  is  easier  to  do  more  for  others  than  to  repress 
individual  desires,  thus  creating  a  gospel  of  activity 
which  in  a  large  measure  displaces  the  old  ascetic  code. 
Altruism  is  thus  a  normal  product  of  a  cohesive  society. 
The  struggles  which  promote  cohesion  force  nations 
to  break  away  from  local  conditions  and  transform 
them  into  a  dominant  element  in  the  more  complex 
societies  that  follow  conquest.  Through  exploitation 
or  through  an  increase  of  productive  power,  a  larger 
income  passes  into  their  hands,  an  egoistic  use  of  which 
would  lead  to  dissipation  and  degeneration.  A  flow 
of  income  is  thus  started  from  the  dominant  to  the 
dependent  class  instead  of,  as  is  the  case  in  an  adhesive 
adjustment,  from  the  dependent  to  the  dominant.  Al- 
truism begins  as  a  love  of  others  within  a  group.  The 
father  who  supports  wife  and  children  has  an  element 
of  altruism  in  his  nature,  even  if  he  follows  a  rule  of 
selfishness  in  his  dealings  with  others.  A  feudal  lord 
who  supports  a  thousand  retainers  is  altruistic  even  if 
he  is  brutal  to  outsiders,  for  he  promotes  cohesion  by 
a  flow  of  income  from  himself  to  them.  An  aristocracy 
is  also  generous  to  the  weaker  of  their  class,  although 


1 70  The  Theory  of  Prosperity 

they  may  be  very  exacting  of  outsiders.  The  same 
tendencies  show  themselves  in  all  cohering  classes 
or  groups.  Within  the  group  there  is  always  a  flow 
of  income  from  the  stronger  to  the  weaker ;  but  for 
this  partial  equalization  of  income  the  group  would 
soon  fall  apart,  the  strong  sinking  into  dissipation 
through  the  superabundance  of  income,  and  the  weaker 
being  forced  to  the  wall  or  compelled  to  sacrifice  group 
interests  to  save  themselves.  When  the  energy  and 
forethought  of  producers  are  intensified,  the  flow  of  in- 
come from  the  more  to  the  less  productive  must  increase, 
as  dissipation  is  deadly  to  those  who  try  to  spend  their 
incomes  on  themselves.  The  groups  in  which  men  are 
interested  become  larger  and  more  intense,  and  with 
this  change  a  larger  part  of  the  total  income  of  society 
is  set  aside  for  common  or  at  least  for  less  individual- 
istic ends.  Hospitals  are  established;  schools  are  made 
free  ;  colleges  are  endowed ;  museums,  libraries,  and  art 
galleries  receive  liberal  support ;  church  funds  grow, 
and  missions  are  formed  at  home  and  abroad ;  all  these 
and  many  other  activities  show  the  growth  of  cohesion 
and  the  flow  of  income  going  with  it.  An  energetic 
cohering  nation  cannot  endure  except  by  changing  the 
direction  of  this  net  flow  of  income,  for  it  is  a  condition 
to  normal  growth  and  the  essence  of  all  progress  ;  ex- 
ploitation continuing  only  where  abnormal  conditions 
have  prevented  the  natural  transformation  that  comes 
through  the  increase  of  vigor  and  efficiency. 

The  decline        If  the  causes  of  exploitation  have  been  correctly  pre- 
o      i     -       sented,  the  conditions  for  its  continuance  and  ultimate 

tation. 

removal  are  apparent.  The  mental  attitude  necessary 
to  survival  and  contentment  in  a  poorer  environment 


Income  as  Fixed  by  Struggle  171 

are  the  sources  of  exploitation  in  a  better  one.  As  has 
been  noticed,  the  extra  income  due  to  industrial  progress 
thus  passes  readily  into  the  hands  of  the  more  progres- 
sive classes,  who  perpetuate  a  state  of  affairs  favorable 
to  themselves  through  an  emphasis  of  the  moral  code 
of  earlier  times.  Instead  of  oppression  being  the  cause  of 
exploitation,  it  is  usually  responsible  for  its  decline.  To 
preserve  a  subject  class,  the  conditions  to  which  they  are 
accustomed  must  be  continued ;  for  with  the  destruc- 
tion of  these  morality  declines,  and  the  class  disappears 
through  dissipation  and  vice.  The  most  complete  and 
longest-enduring  scheme  of  exploitation  would  be  that 
relying  wholly  on  tradition  for  its  perpetuation,  as  op- 
pression and  political  changes  of  any  sort  hasten  the 
end  of  the  condition  they  are  designed  to  further.  If 
tradition  does  not  cause  men  to  continue  their  earlier 
mental  attitudes,  nothing  else  will. 

The  purely  egoistic  forces  have  many  ways  in  which 
to  operate,  slowly  forming  a  new  equilibrium  in  harmony 
with  new  conditions.  One  manifestation  in  modern 
times  is  a  steady  lowering  of  the  birth-rate.  Egoistic 
forces  in  full  sway  bring  population  to  a  stationary  state, 
and  then  the  need  of  laborers  increases  the  incomes  of 
the  laboring  class  until  the  exploitation  ends.  The 
rapid  rate  of  increase  of  population  in  early  times  was 
due  partly  to  the  high  death-rate,  for  if  families  had  not 
been  large,  population  would  not  have  been  kept  up. 
Every  betterment  of  economic  conditions  demands  a 
lower  birth-rate  to  restore  an  equilibrium,  and  in  time 
this  would  be  brought  about  by  physiological  changes 
making  the  race  less  fertile.  But  egoism  can  effect  the 
change  much  more  rapidly  by  changing  the  mental 


172  T/ic  Theory  of  Prosperity 

attitude  of  men  toward  marriage  and  the  care  of  chil- 
dren. A  loosening  of  the  marriage  tie  and  a  consequent 
reducing  of  the  birth-rate  mean  that  there  are  fewer 
individuals  to  arrive  at  maturity ;  so  that  immorality 
can  check  the  increase  of  population,  even  if  there  were 
no  physiological  tendencies  striving  to  create  a  new 
equilibrium. 

Egoistic  forces  are  aided  by  dissipation  in  many  forms, 
industrial  changes  creating  new  forms  of  pleasure  that 
are  not  restrained  by  the  older  moral  code  because  they 
were  unknown  or  slightly  important  when  it  came  into 
being.  Also  in  new  situations  it  is  easy  to  break  loose 
from  the  old  restraints;  and  the  mixing  of  population 
brings  every  one  in  contact  with  forms  of  vice  not  known 
in  his  own  locality.  The  lowest  classes  thus  lose  their 
morality,  and  are  subjected  wholly  to  the  pressure  of 
egoistic  motives,  which  may  have  some  effect  in  keep- 
ing them  out  of  the  worst  forms  of  vice,  but  will  not 
become  effective  until  the  earlier  code  is  subjected  to  a 
severe  strain,  and  put  more  in  harmony  with  the  new 
conditions.  Egoistic  forces  are  stronger  than  those  due 
to  primitive  habits  and  customs,  and  must  in  the  end 
destroy  the  mental  attitude  necessary  to  make  exploita- 
tion possible,  although  they  are  not  the  sole  cause  of 
its  decline. 

As  we  have  seen,  the  interests  of  the  dominant  classes 
are  promoted  by  exploitation  only  when  the  productive 
power  of  society  is  small,  for  they  then  in  order  to 
maintain  their  standard  of  life  need  to  have  their  own 
income  supplemented  from  other  sources.  The  only 
unearned  fund  available  comes  from  exploitation,  and 
it  must  continue  until  other  sources  of  surplus  are 


Income  as  Fixed  by  Struggle  173 

available ;  but  as  land  increases  in  value,  it  is  profit- 
able to  improve  the  conditions  of  the  laborer  so  as  to 
increase  the  rent  derived  from  it.  The  higher  the  price 
of  food  the  more  important  is  the  rent,  and  the  less 
important  is  the  fund  secured  by  depressing  the  con- 
dition of  the  laborers.  When  the  workman  is  given  a 
greater  part  of  the  product,  he  is  induced  to  work  more 
energetically,  and  thus  increase  the  amount  of  rent 
more  than  the  amount  of  the  exploitation  fund  is  de- 
creased. The  landlord  thus  ceases  to  be  an  exploiter 
in  order  to  become  a  greater  consumer  of  the  social  sur- 
plus. With  progress,  therefore,  he  consents  to  changes 
in  the  laborer's  conditions ;  serfs  displace  slaves,  and 
finally  free  laborers  are  put  on  the  land  with  the  con- 
sent of  the  owner.  When  the  rent  of  land  becomes 
more  than  its  whole  productivity  under  earlier  condi- 
tions, the  landlord's  interest  in  free  labor  is  as  great  as 
that  of  workmen ;  for  a  rising  price  of  food  and  raw 
material  brings  the  interests  of  landlords  into  harmony 
with  those  of  society. 

This  interest  in  free  labor  increases  as  soon  as  pro- 
ductive capital  comes  into  use ;  for  it  is  more  perishable 
than  land,  and  to  preserve  it  a  higher  class  of  labor  must 
be  used.  Land  is  not  capable  of  increase,  while  capital 
is ;  as  a  result  the  laboring  class  must  also  increase  to 
keep  it  in  use,  thus  making  capitalists  interested  in  the 
amount  of  population  and  the  productive  powers  of 
laborers  to  an  extent  that  landlords  never  are.  As  soon 
as  capitalists  become  a  dominant  element  in  society  they 
do  away  with  many  primitive  regulations  that  depress 
the  condition  of  the  workman,  and  with  this  change  many 
of  the  cruder  forms  of  exploitation  disappear.  \Vith  the 


i/4  .      The  Theory  of  Prosperity 

introduction  of  machinery  the  capitalist's  interest  in 
free  labor  is  further  augmented ;  mechanical  laborers 
are  displaced,  and  as  they  disappear  the  standard  of 
the  laboring  classes  rises  in  an  inverse  ratio.  Em- 
ployers discover  that  a  high  class  of  laborers  is  more 
productive  in  proportion  to  their  wages  than  are  those 
of  the  lowest  classes,  and  they  also  discover  that  tem- 
perate habits  and  regular  ways  of  living  exert  an  influ- 
ence on  productivity. 

The  interests  of  the  two  classes  are  thus  brought  suf- 
ficiently into  harmony  to  make  employers  willing  to 
give  to  each  class  of  laborers  their  full  product.  If  this 
result  has  not  yet  been  worked  out  in  the  United 
States,  it  is  not  because  the  capitalist  gains  less  by 
the  increase  of  productivity  than  he  loses  by  the  extra 
wages  needed  to  call  it  forth.  The  delay  in  the  recog- 
nition of  this  principle  is  due  partly  to  the  holding 
over  of  ideas  that  originated  in  earlier  epochs,  and 
partly  to  the  immigration  of  workmen  from  regions  where 
the  older  regime  has  not  yet  been  wholly  displaced. 
Employers  are  inclined  to  exploit  laborers  far  more  than 
their  interests  demand,  while  the  latter  still  suffer  from 
competition  with  workmen  coming  from  regions  with 
lower  standards.  However,  these  facts,  bad  as  they 
often  are,  do  not  represent  permanent  tendencies,  for 
the  pressure  of  self-interest  on  both  classes  will  remedy 
these  evils,  and  create  an  equilibrium  making  the  labor- 
ers free  and  giving  to  them  their  full  productivity. 

The  reconstruction  of  old  customs  and  habits  is  ex- 
tremely difficult,  but  a  society  that  is  not  capable  of  the 
task  must  decay,  for  history  shows  that  nations  disinte- 
grate as  soon  as  the  egoistic  interests  of  men  become 


Income  as  Fixed  by  Struggle  175 

predominant.  If  history  also  shows  that  exploitation  is 
present  in  all  nations,  it  is  not  because  exploitation  is  a 
permanent  feature  of  civilization,  but  because  there 
have  been  a  series  of  nations  of  which  each  has  gone 
through  certain  preliminary  stages  of  progress  and 
then  fallen  into  decay,  to  be  displaced  by  new  races 
that  met  the  same  difficulties  and  in  turn  failed  to  solve 
them.  To  say  that  exploitation  is  a  necessary  stage  in 
social  progress  is  different  from  saying  that  it  is  an  en- 
during part  of  national  life.  It  may  be  impossible  for  a 
capitalistic  economy,  such  as  that  we  are  now  entering, 
to  overcome  the  difficulties  that  beset  it ;  but  if  it  does 
succeed,  it  must  eradicate  all  forms  of  oppression.  In 
time,  economic  freedom  is  sure  to  assert  itself,  and  with 
it  will  come  a  new  group  of  restraints  that  will  keep 
men  in  touch  with  their  economic  conditions  without 
depressing  their  individuality. 

An  unfavorable  environment  keeps  men  in  close  Social 
touch  with  it.  Those  who  lack  the  physical  qualities  integration- 
demanded  by  their  situation,  as  well  as  those  who  are 
dissatisfied  with  their  condition,  their  food,  and  other 
goods,  are  ruthlessly  swept  away,  and  their  places  are 
filled  by  those  contented  with  their  present  lot.  A  state 
of  nature  puts  a  ban  on  pessimism  by  quickly  displacing 
the  discontented  or  despondent,  those  who  violate  social 
traditions  failing  through  their  lack  of  conformity  to 
natural  conditions.  In  itself  a  rule  of  conduct  has  no 
force;  the  real  force  lies  in  the  elimination  of  those 
who  violate  it.  Primitive  morality  is  a  clanger  signal 
which  no  one  can  neglect  without  feeling  the  effect 
of  the  eliminating  process,  and  it  is  a  social  necessity 
so  long  as  these  conditions  continue.  So  long  as  this 


1 76  The   Theory  of  Prosperity 

force  operates  naturally,  there  is  social  integration ; 
men  grow  into  a  common  likeness  when  a  harsh  nature 
cuts  off  all  that  differ  from  the  one  necessary  standard. 

If  a  race  migrates  into  a  better  region,  or  its  social 
condition  is  improved  by  an  advance  in  civilization,  its 
morality  and  traditions  remain,  but  the  elimination 
back  of  them  ceases  to  act.  New  types  now  find 
means  of  persisting,  thus  destroying  the  solidarity  of 
earlier  times  by  repeated  differentiations  from  the  old 
type.  This  lack  of  harmony  ends  social  discipline, 
because  the  only  support  of  the  old  morality  falls 
away  when  the  process  of  elimination  ceases  to  enforce 
it.  An  arbitrary  elimination  affecting  the  individuals  of 
all  classes  alike  cuts  off  no  class  or  type,  and  many  vari- 
ations have  an  equal  chance  of  perpetuation.  The  elim- 
ination making  for  social  progress  must  displace  whole 
classes,  thus  forcing  society  to  move  in  a  particular 
direction.  Class  after  class  of  the  unfit  is  then  cut 
off,  and  the  surviving  portion  to  an  increasing  degree 
acquires  the  same  qualities  and  habits.  To  enforce  so- 
cial customs  and  traditions,  a  natural  elimination  is  nec- 
essary, and  without  it  morality  soon  becomes  a  dead 
letter.  The  only  social  safeguards  are  natural  standards 
and  a  natural  elimination  enforcing  them.  Whatever 
destroys  a  close  contact  with  nature  makes  elimination 
arbitrary,  and  hastens  social  disintegration. 

Men  may  be  said  to  be  naturally  exploited  when  the 
conditions  of  existence  are  so  harsh  that  no  one  with 
less  than  the  maximum  income  can  survive.  They  are 
socially  exploited  when  an  increased  income  is  prevented 
by  class  or  race  struggles.  The  naturally  exploited  will 
be  frugal  and  contented,  for  they  have  a  natural  elimi- 


Income  as  Fixed  by  Struggle  177 

nation  in  operation,  cutting  off  all  the  dissatisfied  and 
abnormal.  But  the  socially  exploited  have  no  elimina- 
tion of  the  discontented  or  of  those  out  of  harmony  with 
the  dominant  type,  because  conditions  external  to  them 
instead  of  their  own  qualities  determine  survival.  It  is 
then  that  the  dissatisfied,  the  pessimistic,  the  abnormal, 
and  the  vicious  have  opportunities  equal  to  others  and 
by  tainting  society  with  their  peculiar  views  disrupt  it. 

If  an  income  of  fifty  cents  a  day  is  the  maximum,  all 
who  are  dissatisfied  with  this  amount  perish.  But  if 
the  natural  rate  of  wages  is  eighty  cents,  while  the  real 
rate  remains  at  fifty  cents,  it  is  not  natural  conditions, 
but  the  notions  of  a  dominant  class  that  decide  who 
shall  be  eliminated;  and  the  conditions  of  elimination 
thus  being  arbitrary,  the  dissatisfied  and  vicious  remain 
to  disrupt  social  bonds.  If,  however,  the  rate  of  wages 
rises  to  its  maximum,  a  natural  elimination  once  more 
promotes  social  integration.  Those  who  are  dissatisfied 
with  eighty  cents  a  day  are  eliminated  in  the  same  way 
that  those  demanding  more  than  fifty  cents  a  day  were 
displaced  in  the  earlier  society,  while  those  who  get 
the  eighty  cents  and  use  it  badly  are  cut  off  by  dissipa- 
tion. There  is  now  a  single  mode  of  life  that  fully 
meets  the  conditions,  and  those  who  do  not  adopt  it 
perish  through  a  natural  process.  A  new  social  dis- 
cipline will  spring  up,  and  those  who  accept  it  have  an 
advantage  of  which  they  cannot  be  deprived. 

No  matter  how  high  the  natural  rate  of  wages,  these 
forces  make  elimination  definite.  If  wants  increase 
more  rapidly  than  productive  power,  the  man  with  two 
dollars  a  day  is  farther  from  a  complete  satisfaction  of 
his  wants  than  is  he  with  only  a  dollar,  the  pressure 


1/8  The  Theory  of  Prosperity 

from  the  insufficiency  of  income  growing  with  each  in- 
crease of  the  standard.  This  pressure  makes  the  con- 
tact between  men  and  their  environment  closer,  and 
puts  at  a  disadvantage  those  who  cannot  secure  the 
completer  adjustment.  The  inefficient  and  less  active 
are  eliminated,  and  society  is  integrated  by  the  fact  that 
the  survivors  have  to  a  greater  degree  the  same  faculties 
and  impulses.  Each  elevation  of  social  standards,  aug- 
menting the  pressure  of  the  insufficiency  of  income, 
makes  the  surviving  type  more  definite  in  its  character- 
istics, and  puts  those  lacking  these  common  qualities  at 
a  greater  disadvantage.  A  natural  rate  of  wages  and  a 
definite  elimination  decreasing  the  differences  in  men 
have  common  causes.  Any  standard  lower  than  the 
natural  makes  survival  depend,  not  upon  superiority, 
but  upon  the  fancies  of  some  superior  class,  the  gen- 
eral adjustment  of  laborers  to  nature  counting  for  little 
if  men,  not  nature,  decide  who  shall  get  employment. 
Qualities  not  affecting  survival  have  no  force  back  of 
them  by  which  they  are  perpetuated  and  made  universal. 
An  arbitrary  selection  based  upon  conditions  objective 
to  the  class  among  which  it  is  going  on  can  be  pre- 
vented only  by  a  rise  of  wages  to  the  natural  rate.  The 
relation  of  each  worker  to  nature  is  again  restored,  and 
a  definite  elimination  once  more  tends  to  unify  society. 

A  single  integrated  type  of  men  in  a  given  environ- 
ment have  individually  the  same  relations  to  the  environ- 
ment as  if  there  were  but  one  man  in  it.  Each  one  has 
in  him  all  the  qualities  needed  for  the  adjustment  of  the 
race  to  it  and  is  in  the  same  position  that  the  isolated 
freeman  was  in  primitive  times.  All  are  adjusted  to 
nature ;  for  each  increase  in  the  pressure  of  wants 


Income  as  Fixed  by  Struggle  179 

makes  elimination  more  definite  while  through  it  the 
moral  code  becomes  more  forceful  and  throws  about 
them  additional  safeguards.  There  is  no  substitute  for 
the  educational  effects  of  a  direct  contact  with  nature, 
and  it  alone  can  bring  out  industrial  qualities  and  cut 
off  those  who  do  not  possess  them.  In  advanced  soci- 
eties, the  form  of  contact  with  nature  is  modified,  but  its 
essence  is  not  altered. 


CHAPTER   II 

INCOME  AS  INCREASED  BY  ADJUSTMENT 

Mental  ADAPTATION  is  effected  either  by  changes  in  the  physi- 

aptation.  ^  man>  m  ^Q  relations  of  men  to  nature,  or  in  the  rules 
of  action  that  become  embodied  in  morality  and  tradi- 
tion. It  is  connected  primarily  with  nutrition,  which  leads 
to  a  growth  of  function  and  of  the  power  of  assimilation. 
While  the  least  adapted,  hampered  by  under-nutrition, 
are  killed  off  by  starvation  or  disease,  over-nutrition  is 
equally  deadly  to  those  whose  productive  power  permits 
indulgence  in  ways  that  weaken  the  physical  man.  For 
those  who  avoid  these  extremes  there  is  a  growing 
economy  of  assimilation  and  an  increase  of  function 
which  give  to  the  survivor  greater  activity  and  an  ever 
increasing  adjustment  to  his  environment.  The  round 
of  production  and  consumption  thus  becomes  less  waste- 
ful and  the  social  surplus  is  better  conserved. 

These  changes,  however,  are  merely  one  phase  of 
adaptation.  Along  with  them  go  others  of  a  psychic 
nature  by  which  states  of  pain  are  transformed  into 
states  of  pleasure.  Pain  is  the  record  of  a  failure  in 
adjustment  and  reveals  some  obstacle  in  the  way  of  suc- 
cess. In  a  life  where  every  step  is  a  struggle  against  all 
manner  of  difficulties,  against  disease,  against  one's  own 
kind,  and  against  other  species,  the  law  of  nature  pro- 
vides a  tragic  end  for  every  animal.  It  must  develop 
energy  enough  to  remove  obstacles  or  to  circumvent 

i  So 


Income  as  Increased  by  Adjustment  181 

them.  The  earliest  and  simplest  road  to  success  was 
through  the  passions  which  sprang  up  when  obstacles 
in  the  environment  could  be  removed  or  destroyed  by  a 
direct  attack.  But  when  obstacles  cannot  be  overcome 
by  direct  opposition,  desire  appears  and  develops  mental 
traits  in  favor  of  indirect  methods  of  approach.  It  be- 
gins with  some  weak  manifestation,  and  gradually  grows 
until  its  strength  compels  action.  Then  it  disappears 
through  satiety  only  to  reappear  and  to  increase  until  it 
is  again  dominant.  This  constant  recurrence  of  ante- 
cedent conditions  develops  memory,  imagination,  and 
reasoning.  Memory,  calling  up  the  results  of  past  expe- 
rience, permits  the  adoption  of  methods  that  involve  the 
least  danger,  and  thus  develops  caution  and  prudence. 
When  action  becomes  imperative,  some  plan  of  indirect 
attack  has  been  devised  that  increases  the  probability  of 
success. 

Desire,  however,  is  not  a  final  stage  because  it  does 
not  indicate  complete  adjustment.  The  presence  of 
obstacles  to  be  overcome  indicates  a  lack  of  adjustment 
between  the  individual  and  his  environment.  There  is 
also  in  desire  some  element  of  pain,  so  that  in  spite  of 
the  intensity  of  its  pleasures,  desire  goes  with  passion 
and  pain.1  The  greater  and  more  persistent  the  obstacle, 
the  stronger  must  be  the  desire  before  means  for  its 
satisfaction  can  be  successfully  carried  through. 

Where  the  relations  of  men  to  the  environment  are 
constant  and  no  opposition  to  the  attainment  of  ends 
exists,  unimpeded  activity  becomes  possible.  There 
is  a  direct  association  between  each  end  and  the  activity 
by  which  it  is  reached.  The  impulse  to  do  receives  no 

1  Ward,  "The  Psychic  Factors  of  Civilization,"  page  50. 


Theory  of  Prosperity 

check,  nor  do  obstacles  force  the  use  of  intermediate 
steps.  This  is  the  final  stage  of  adjustment  in  which 
no  opposition  or  element  of  pain  disturbs  states  of  un- 
alloyed pleasure.  Impulses  are  the  motives  that  prompt 
this  complete  adjustment. 

In  the  diagram  the  relative  importance  of  these 
stages  is  indicated  by  lines  drawn  from  left  to  right. 
Pain,  dominant  in  the  first  stage,  gradually  decreases  in 
amount  until  in  the  final  stage  it  is  but  little  more  than 
a  potential  force.  Passion  becomes  prominent  in  the 
second  and  desire  in  the  third,  only  in  turn  to  be 


Way  Blocked    Direct  Opposition         Indirect       Constant  Relations  No  Oppositioi, 

Opposition    „„  ..I?.;;.?;"  ..;;.»,.y 


PROGRESS 


dwarfed  in  importance  by  newer  forces  that  indicate 
more  complete  adjustment.  While  passions  might  be 
lost  and  pains  might  become  merely  nominal,  desire 
cannot  disappear  in  an  environment  like  our  own  where 
so  many  irregularities  prevent  complete  adjustment. 
Impulses  demand  constant  relations,  and  can  displace 
desires  only  in  a  perfect  environment.  In  the  transi- 
tion from  pain  to  passion  the  more  active  get  an 
advantage  that  displaces  opponents  and  opposition, 
for  sluggishness  in  contest  means  elimination.  In  the 
transition  from  passion  to  desire  a  love  for  the  rational 


Income  as  Increased  by  Adjustment  183 

gets  the  first  place,  while  in  the  change  from  desire  to 
impulse,  the  ideal  becomes  the  great  moving  power. 

Activity  is  the  blind  outlet  of  surplus  energy,  with  no 
other  end  than  the  pleasure  its  exit  gives.  The  rational 
and  the  ideal,  though  they  reach  it  in  different  ways, 
have  the  same  goal  —  perfection.  In  cases  of  partial 
adjustment  the  normal  is  the  perfect  in  terms  of  desire. 
It  is  the  regular  constant  act  contrasted  with  irregular 
exceptional  acts  that  special  conditions  necessitate. 
The  normal  is  thus  the  present  environment  in  its  sim- 
plest form.  It  can,  however,  never  free  itself  from  the 
conditions  of  partial  adjustment.  Where  men  reason 
there  is  pain  and  non-adjustment  in  the  background. 
Impulse,  however,  moves  directly  away  from  pain,  giv- 
ing the  perfect  with  no  pain  associations,  and  creating 
the  complete  adjustment  that  has  no  costs  nor  fears. 
Surplus  energy  stimulates  impulse,  and  between  it  and 
its  object  there  is  no  bar,  obstacle,  nor  check. 

The  normal,  from  another  standpoint,  is  the  useful, 
that  which  to  the  greatest  degree  avoids  pain  and  pre- 
vents elimination.  The  desire  for  useful  objects  causes 
energy  to  go  out,  not  in  pleasurable  directions  but  in 
those  that  give  a  return  of  useful  goods,  and  thus  creates 
a  diversion  and  reduction  of  energy.  Where  the  desires 
are  strong,  the  output  of  energy  in  creating  the  useful 
has  been  forced  to  take  unnatural  directions.  The 
force  of  desire  is  thus  the  measure  of  the  deviation  of 
energy  from  its  most  pleasurable  channel,  and  the 
satisfaction  of  desire  is  the  reward  for  this  deviation 
and  loss.  This  loss  is  prevented  or  reduced  in 
amount  by  mechanical  action  ;  for  every  motor  reaction, 
association  of  ideas,  habit,  custom,  or  other  economy  of 


1 84  The  Theory  of  Prosperity 

mind  and  matter  reduce  costs  by  making  the  useful  act 
more  nearly  a  pleasurable  action.  Economy,  inventive 
reasoning,  and  other  devices  have  as  their  end  the 
satisfaction  of  desire  without  pain.  The  useful  thus 
becomes  the  pleasurable  by  every  increase  of  routine. 

The  pleasurable,  however,  is  not  primarily  the  object 
that  satisfies  desire,  but  the  activity  that  affords  an  out- 
let for  surplus  energy.  With  increasing  energy  there 
is  a  demand  for  more  avenues  of  exit.  The  impulse  to 
do  is  therefore  toward  varied  action  instead  of  toward 
concentrated  useful  action.  The  pleasurable  seems  to 
be  the  useless  and  often  is  so  in  restricted  environments ; 
but  that  which  is  useless  —  a  mere  expenditure  of 
energy  —  may  become  the  useful  by  a  change  of  situa- 
tion. The  impulse  toward  the  pleasurable  induces  men 
to  change  environments — to  seek  the  place  where  the 
pleasurable  is  the  useful.  The  desire  for  goods,  on  the 
other  hand,  forces  men  to  become  mechanical  and  eco- 
nomical, that  is,  to  put  themselves  in  a  situation  where 
the  useful  becomes  the  pleasurable  through  the  decrease 
of  costs  and  the  increase  of  satisfactions. 

Each  of  these  roads  leads  to  perfection  though  in  a 
different  way.  The  normal  is  the  goal  of  desire ;  the 
ideal  is  that  of  impulse.  Desire  demands  changes  in 
men  by  which  the  useful  may  become  the  pleasurable. 
It  creates  habits,  routine,  and  mechanisms,  and  thus  in- 
creases the  adaptation  of  men  to  particular  environ- 
ments. Impulse  alters  the  environment  so  that  the 
pleasurable  becomes  the  useful,  and  thus  develops 
nervous  centres,  motor  reactions  and  new  avenues  along 
which  surplus  energy  may  expend  itself.  There  is 
always  a  new  norm  back  of  each  desire,  and  a  new 


Income  as  Increased  by  Adjustment  185 

ideal  in  each  increased  breadth  of  the  expenditure 
of  energy.  In  either  case  there  is  mental  adapta- 
tion, and  men  in  thought  and  activity  approach  more 
nearly  the  goal  that  perfection  demands.  The  nor- 
mal and  the  ideal  become  one  in  the  final  stage  of 
progress. 

In  the  foregoing  analysis  the  meaning  and  place  of  impulse, 
pain,  passion,  and  desire  are  readily  seen.  The  use  of 
impulse  is  not,  however,  so  clear,  for  it  has  been  used 
in  a  way  that  suggests  a  variety  of  meanings  among 
which  a  common  thought  is  apparently  absent.  It  has 
been  spoken  of  as  a  movement  away  from  pain,  as  a 
flow  of  surplus  energy,  as  a  pressure  creating  adjust- 
ment, as  a  social  force,  and  as  a  pressure  to  make  ends 
instead  of  satisfactions  the  motive  for  living.  The 
confusion,  however,  is  more  apparent  than  real,  and 
with  a  little  care  the  thread  of  the  argument  can  be  fol- 
lowed. The  changes  that  seem  inconsistent  are  really 
changes  not  in  the  use  of  the  word,  but  in  the  conditions 
under  which  the  surplus  energy  of  men  goes  out. 

In  the  round  of  consumption  and  activity  goods  are 
transformed  into  utility,  utility  into  energy,  and  energy 
is  expended  in  production,  replacing  the  lost  goods  and 
starting  a  new  round  of  consumption.  Impulse  is  the 
psychic  feeling  accompanying  the  outgo  of  energy. 
Desire  is  the  feeling  accompanying  the  consumption  of 
goods.  From  each  of  these  sources  come  pleasures,  mo- 
tives, instincts,  and  habits,  and  from  them  in  turn  are  de- 
rived premises  upon  which  trains  of  reasoning  are  based. 
The  reasoning  based  on  desire  has  been  worked  out  in 
the  prevalent  utilitarian  philosophy,  but  no  correspond- 
ing study  has  been  made  of  impulse.  There  is,  it  is 


1 86  The  Theory  of  Prosperity 

true,  a  philosophy  that  naturally  would  seek  this  basis, 
but  its  advocates  have  insisted  on  the  intuitional  char- 
acter of  its  ideals  and  premises,  and  thus  have  divorced  it 
from  the  biologic  and  economic  basis  upon  which  utili- 
tarianism rests. 

Because  of  the  evolutionary  process  men  have  acquired 
certain  normal  wants  and  activities.  Particular  goods 
are  demanded,  and  the  activities  go  out  in  fixed  organic 
grooves  to  supply  them.  The  normal  man  in  a  given 
situation  tends  to  do  the  acts  that  create  the  goods  he 
needs.  If  his  energy  is  just  enough  to  supply  these 
wants,  he  remains  static;  but  the  evolutionary  process 
being  still  at  work,  creates  greater  economies  in  struc- 
ture, and  adds  to  the  knowledge  and  skill  of  men.  The 
goods  made  under  the  new  conditions  are  more  than 
sufficient  to  restore  the  energy  needed  to  produce  them, 
thus  making  a  surplus  of  energy  the  necessary  result  of 
progress.  The  normal  man  already  has  energy  enough 
to  keep  active  the  developed  powers  of  mind  and  body 
on  which  his  normality  and  survival  depend.  This 
energy  goes  out  in  fixed  channels  and  creates  goods  sup- 
plying the  developed  wants  of  men.  The  new  energy, 
not  being  demanded  by  the  conditions  of  present  ad- 
justment, is  free  to  go  out  in  new  lines,  to  develop  new 
activities,  and  to  supply  new  wants.  The  exit  of  this 
surplus  is  forced  into  particular  directions,  because  the 
past  development  of  men  has  already  supplied  the 
energy  needed  in  other  directions. 

Children  furnish  examples  of  how  surplus  energy 
finds  an  exit.  Sport  is  merely  a  pleasant  outlet  for  sur- 
plus energy.  Subjectively  all  methods  of  exit  are  alike, 
but  nature  or  society  puts  more  obstacles  to  one  method 


Income  as  Increased  by  Adjustment  187 

of  exit  than  to  others,  and  thus  forces  sports  to  adjust 
themselves  to  the  local  conditions  of  time  and  place. 
Each  season  and  each  locality  has  its  ways  in  which 
children  satisfy  their  love  for  activity,  and  thus  a  regu- 
larity of  action  is  attained  which  the  mere  exit  of  sur- 
plus energy  would  not  of  itself  give. 

The  sports  of  children  end  merely  in  activity  because 
the  evolutionary  process  does  not  work  on  them.  They 
survive  through  their  parents,  not  through  themselves. 
The  surplus  energy  of  men,  however,  has  effects  on 
survival  because  it  develops  faculties,  thus  giving  a 
greater  freedom  of  action  than  they  would  otherwise 
have.  This  freedom  is  primarily  detrimental  because  it 
decreases  the  definite  relations  between  men  and  the 
immediate  environment  upon  which  welfare  depends. 
There  is  always  some  best  way  of  acting  when  in  con- 
tact with  nature,  and  those  who  do  not  follow  it  have 
a  penalty  to  pay.  To  get  freedom  of  action  demands  a 
break  with  the  environment  and  hence  a  loss  of  adjust- 
ment. Freedom  is,  therefore,  primarily  disrupting 
and  creates  distinct  losses.  In  spite  of  this  fact, 
however,  it  is  advantageous  because  it  forces  men  into 
new  environments.  Breaks  with  present  conditions  are 
bad  from  the  standpoint  of  adjustment,  but  nations  gain 
by  them  if  there  is  a  series  of  increasingly  better  envi- 
ronments into  which  men  move  when  their  present 
relations  are  disturbed.  If  a  normal  equilibrium  is  once 
created,  the  free  energy  of  men  ceases  to  go  out  as 
mere  sport,  but  has  its  direction  shaped  by  the  nature  of 
the  external  conditions  to  which  adjustment  is  going  on. 
Surplus  energy  thus  becomes  a  definite  force  breaking 
with  present  conditions  and  pushing  men  along  the 


1 88  The  Theory  of  Prosperity 

line  of  least  resistance  through  a  series  of  improving 
situations. 

The  normal  of  each  epoch  becomes  the  starting-point 
of  new  adaptations  that  produce  a  man  normal  to  a  new 
situation  and  with  even  more  free  energy.  Aside  from 
normal  tendencies,  men  need  only  surplus  energy  to 
force  them  through  every  improving  situation  that 
nature  permits  them  to  occupy.  Surplus  energy  thus 
moves  men  toward  the  ideal  which  will  in  the  end  be 
reached  if  no  insuperable  obstacle  is  in  the  way. 
Impulse  naturally  indefinite  is  given  a  fixed  direction  by 
the  presence  of  these  ever  improving  environments. 
It  thus  becomes  associated  with  ends,  and  its  strength 
is  the  measure  of  the  distance  men  have  gone  from  the 
normal  of  past  adjustment  toward  the  ideal  of  the 
future.  The  stronger  the  impulse,  the  more  frequent 
are  the  breaks  with  the  past  and  the  more  readily  do 
men  slip  into  new  and  more  advantageous  situations. 
Impulse  is  primarily  away  from  the  grind  and  routine 
of  the  past,  but  this  routine  once  broken  is  made  over 
into  harmony  with  the  new  environment.  There  is  thus 
an  increase  of  adaptation  and  a  growth  of  the  social 
surplus  giving  more  surplus  energy  and  a  greater  power 
to  break  with  present  conditions. 

When  in  these  ways  a  better  environment  is  entered, 
the  old  harmony  between  the  desires  and  the  environ- 
ment is  disturbed.  The  desires  normally  strong  enough 
to  induce  men  to  surmount  the  obstacles  to  success,  are 
too  strong  in  the  better  environment.  Men  now  have 
more  energy  or  fewer  obstacles,  and  in  either  case  a 
more  complete  satisfaction  of  the  inherited  desires  is 
possible.  This  leads  to  the  over-nutrition  of  certain 


Income  as  Increased  by  Adjustment  189 

parts,  a  waste  of  energy  and  a  loss  of  physical  vigor. 
The  man  normal  to  the  new  situation  must  have  these 
desires  reduced.  To  those  who  indulge,  they  become  an 
evil  leading  to  elimination. 

Over-nutrition  and  the  consequent  indulgence  lower 
the  estimate  of  the  self  and  the  reaction  against  them 
leads  to  self-denunciation.  The  whole  self  or  some 
part  of  it  is  looked  upon  as  depraved.  If  the  antipathy 
to  self  assumes  a  religious  form,  the  doctrine  of  total 
depravity  appears ;  if  it  assumes  a  moral  form,  the 
passions  are  denounced  as  vicious.  In  either  case  self- 
restraint  becomes  a  dominant  motive,  and  the  self  is 
pictured  as  lacking  some  of  the  qualities  that  belong  to 
the  normal  man.  There  arises  in  this  way  a  breach 
between  the  individual  and  the  type  through  which  it  is 
freed  from  imperfections.  The  type  is  associated  with 
the  group  to  which  a  man  belongs,  thus  raising  it  above 
the  individual.  Each  person  makes  the  model  of  his 
group  a  man  like  himself,  but  without  his  weaknesses 
and  shortcomings.  He  thus  creates  a  social  standard 
above  that  of  individual  men. 

There  comes  thus  into  existence  a  third  category. 
Between  the  like  and  the  unlike,  the  good  and  the  bad, 
is  the  partly-different.  It  has  the  good  qualities  of  the 
like  but  is  without  the  imperfections  of  individuals,  and 
becoming  idealized  is  associated  with  the  group  to 
which  a  man  belongs.  This  tendency  causes  men  to 
have  confidence  in  the  group  of  which  they  are  a  part, 
and  in  their  leaders,  who  when  idealized,  seem  free  from 
human  imperfections.  All  recognized  shortcomings  are 
imputed  to  individuals,  the  type  being  raised  higher  by 
each  contrast  between  personal  weakness  and  group 


190  The  Theory  of  Prosperity 

integrity.  A  Christian  must  think  of  a  Christian  as 
better  than  himself  before  his  religion  becomes  a  social 
force.  He  then  refuses  to  impute  to  the  church  the 
weaknesses  and  motives  that  he  finds  in  himself  or  in 
other  individuals.  In  politics,  also,  a  man  thinks  of  his 
party  and  its  leaders  as  better  than  himself. 

This  idealization  of  the  partly-different  takes  place  in 
every  field  of  social  activity.  Each  instance  of  personal 
indulgence  or  weakness  leads  to  the  elevation  of  some 
type  that  becomes  the  norm  of  activity.  The  desire  to 
associate  with  the  better-than-self  helps  the  individual 
to  repress  his  passions  and  shortcomings.  The  contrast 
with  the  partly-different  thus  tends  to  elevate  him  and 
put  him  on  a  level  with  the  ideal.  The  hero,  the  gen- 
eral, the  king,  the  noble,  the  gentleman,  the  Virgin,  the 
Madonna,  the  Christ,  all  have  in  them  human  elements, 
but  each  is  without  the  imperfections  found  in  indi- 
viduals. Ideals  raise  the  norm  and  depress  the  self. 
The  bolder  and  more  vivid  they  are,  the  more  depraved 
the  individual  appears,  and  the  stronger  the  motives  for 
personal  improvement.  Self-restraint  elevates  the  race 
and  creates  a  confidence  in  its  integrity  and  purity.  It 
is  a  higher  personality  because  it  is  the  person  minus 
his  shortcomings.  Men  thus  become  absorbed  in 
national  life  and  in  its  various  institutions.  Each 
group  is  better  than  the  individuals  that  compose  it, 
and  furnishes  standards  by  which  they  are  judged.  A 
nation  is  thus  not  a  democracy  of  equal  individuals. 
The  belief  in  a  better-than-self  is  the  binding  ele- 
ment on  whose  ascendency  the  continuance  of  each 
social  group  and  institution  depends.  Above  each 
individual  is  the  partly-different,  the  better-than-self  ; 


Income  as  Increased  by  Adjustment  191 

below  him  is  the  different  —  the  worse-than-self.  Social 
conflicts  are  with  the  latter,  while  individual  conflicts 
are  with  the  elements  in  the  self  differing  from  the 
former.  The  feeling  of  depravity  is  a  stepping-stone 
to  society,  the  belief  in  total  depravity  being  an  over- 
emphasis of  a  quality  needed  by  all  social  beings.  Only 
the  groups  who  feel  it  can  participate  freely  in  the 
higher  forms  of  institutional  life.  Self-repression  is 
group  exaltation  ;  it  makes  clubs,  unions,  clans,  parties, 
and  churches,  and  these  in  turn  pave  the  way  for  the 
feeling  of  nationality.  A  simple  impulse  thus  produces 
great  effects.  Men  with  a  large  social  surplus  cannot 
remain  normal  except  through  changes  that  impute  to 
the  social  type  a  higher  personality  than  that  found  in 
the  self.  Society  is  the  better-than-self. 

Impulse  thus  assumes  three  forms.  Primarily  it  is  a 
movement  away  from  pain,  but  as  a  manifestation  of 
surplus  energy  it  is  converted  into  a  movement  away 
from  the  local  environment,  the  break  with  present  con- 
ditions being  more  than  compensated  for  by  the  better 
environment  into  which  men  move.  This  improvement 
disturbs  the  psychic  as  well  as  the  physical  adjustment, 
and  makes  some  of  the  inherited  desires  too  strong  for 
present  needs.  These  desires  being  a  part  of  the  self, 
a  movement  away  from  the  self  is  made  necessary  by 
the  change  of  environment.  An  indefinite  impulse 
away  from  pain  is  thus  transformed  into  a  more  definite 
impulse  away  from  the  environment,  and  finally  into  a 
very  definite  impulse  away  from  the  self.  Surplus 
energy  makes  changes  in  all  these  fields,  and  forces 
men  in  the  direction  of  the  ideal  in  which  there  is  no 
pain,  no  opposition,  and  no  defect. 


192  The  Theory  of  Prosperity 

Idealism.  Ideals  are  places  and  concepts  better  than  the  real 

toward  which  the  impulses  of  men  drive  them  ;  impulses 
are  surplus  energy  flowing  out  in  a  channel  fixed  by 
environing  conditions.  Surplus  energy  thus  stimulates 
definite  impulses  that  move  men  toward  the  goal  of 
complete  adjustment.  When  a  man  is  completely  iso- 
lated, the  waste  due  to  expenditure  of  energy  just  equals 
the  nutrition  obtained  through  the  consumption  of  goods. 
An  outlay  of  energy  in  excess  of  nutrition  reduces  the 
physical  vigor ;  an  excess  of  nutrition  over  energy  causes 
degeneration  and  dissipation.  When  there  is  more 
nutrition  than  waste,  an  organism  is  anabolic ;  while 
in  the  opposite  condition  of  more  waste  than  nutrition, 
it  is  katabolic.1  It  cannot,  therefore,  be  anabolic  or 
katabolic  except  as  it  has  a  complement  with  the  oppo- 
site tendency,  as  happens  in  sex  relations.  Males  are 
katabolic,  the  energy  expended  tending  to  exceed  the 
nutrition,  while  females  are  anabolic  in  that  they  tend 
to  store  up  energy  which  subsequently  is  used  in  repro- 
duction. Sex  differentiation  thus  allows  the  males  to  be 
more  energetic  and  the  females  to  provide  more  fully 
for  the  young  than  if  each  individual  maintained  a  strict 
equilibrium  between  waste  and  nutrition. 

This  tendency  to  perpetuate  a  katabolic  predomi- 
nance is  manifest  wherever  complementary  relations 
exist.  Increased  adjustment  gives  men  surplus  energy, 
and  makes  them  katabolic.  This  would  be  injurious 
unless  some  complement  existed  that  becomes  anabolic 
as  men  become  katabolic.  Men  and  the  environment, 
or  men  and  society  in  its  broadest  sense,  are  com- 
plementary in  this  way.  For  individual  men,  society 

1  See  Geddes's  and  Thomson's  "  Evolution  of  Sex." 


Income  as  Increased  by  Adjustment  193 

comprises  the  totality  of  those  external  environmental 
factors  adapted  to  their  wants  and  needs.  Their  sur- 
plus energy  can  increase  the  waste  from  action  more 
rapidly  than  nutrition  for  its  repair,  if  social  relations 
are  steadily  improving  so  that  more  is  stored  up  to  aid 
men  in  the  future.  The  growth  of  capital,  the  cultiva- 
tion of  land,  the  erection  of  buildings,  the  increase  of 
machinery,  the  making  of  roads,  the  construction  of 
railways,  the  beautifying  of  cities,  and  other  improve- 
ments make  society  anabolic,  and  thus  allow  men  to 
become  more  katabolic.  In  an  improving  society  each 
round  of  production  and  consumption  leaves  a  slight  sur- 
plus which,  becoming  energy  in  men,  makes  them  more 
active ;  and  in  the  outgo  of  energy  the  environment  is 
improved  so  that  more  can  be  stored  up  for  the  subse- 
quent use  of  men.  The  surplus  is  thus  enlarged,  more 
energy  is  generated,  men  increase  in  activity,  and 
society  stores  up  still  more  for  subsequent  use. 

There  is,  therefore,  a  constant  pressure  to  make  men 
katabolic  as  society  becomes  anabolic.  Since  society  in 
its  most  concrete  forms  is  a  group  of  places,  it  can  be 
said  that  places  become  anabolic  to  the  degree  that  the 
pressure  of  surplus  energy  makes  men  active.  The 
katabolic  man  is  the  best  man,  and  the  anabolic  place 
is  the  best  place.  Men,  through  evolution,  therefore, 
lose  anabolic  tendencies,  and  places  acquire  them. 
These  facts  shape  the  ideals  of  men.  Personal  ideals 
are  a  union  of  katabolic  tendencies ;  place  ideals  are 
increasingly  anabolic.  Men  eject  from  their  ideal 
of  themselves  anything  that  is  not  expressive  of  their 
energy.  The  hero  is  a  doer,  not  a  consumer.  On 
the  other  hand,  places  are  idealized  for  their  stability, 


194  The  Theory  of  Prosperity 

permanence,  richness,  and  beauty.  They  yield  satis- 
factions, and  restore  the  waste  wrought  in  men  by  the 
intensity  of  their  activity.  Surplus  energy  is  thus  the 
source  of  the  process  of  idealization,  impelling  men  to 
be  more  active,  and  causing  them  to  set  up  as  an  ideal 
a  man  more  katabolic  than  themselves.  To  get  a  new 
equilibrium,  places  must  be  idealized  in  order  that 
they  may  appear  more  anabolic  than  they  are.  Each 
increase  of  energy  emphasizes  this  tendency.  Men 
have  always  before  them  a  more  katabolic  concept  of 
personality  and  a  more  anabolic  concept  of  places  than 
they  have  attained  or  known. 

Idealism  is  the  isolation  of  anabolic  and  katabolic 
concepts  wrought  out  by  the  pressure  of  surplus  energy. 
Once  started,  the  process  cannot  stop  until  energy  is 
idealized  as  God,  and  society  is  considered  the  mother 
of  all.  These  two,  when  isolated,  represent  the  sum  of 
katabolic  and  anabolic  tendencies.  The  same  contrast 
yields  religion  as  opposed  to  science,  and  the  man  or 
individual  as  opposed  to  organized  society.  An  ideal 
is  not  useful  and  hence  cannot  become  normal  unless 
its  complement  is  developed  to  an  equal  degree.  Defi- 
nite ends  are  placed  before  men  by  the  isolation  of  the 
anabolic  from  the  katabolic.  The  initial  tendency  away 
from  self  is  transformed  into  an  endeavor  to  become 
katabolic,  while  the  tendency  to  break  with  place  and 
environment  becomes  a  force  that  makes  them  more 
anabolic.  Impulse  in  this  way  gets  a  definite  goal  as 
fixed  as  are  the  objects  of  desire.  It  is  heredity  ex- 
pressed in  activity. 

Selection.  The  process  of  elimination  has  no  goal  or  end,  but  is 

simply  away  from  pain.     If  the  elimination  is  at  definite 


Income  as  Increased  by  Adjustment  195 

points  social  integration  results,  a  clearly  defined  type 
appears,  the  energy  is  increased  and  a  normal  standard 
is  formed  by  which  individuals  can  be  judged.  Were 
it  not  for  the  increase  of  energy,  the  type  and  the 
standard  would  tend  to  remain  static.  As  elimination 
cuts  down  pain,  there  is  set  free  among  the  survivors  a 
like  amount  of  energy  that  can  be  used  in  new  ventures. 
The  normal  activity  is  thus  disturbed  and  a  new  equi- 
librium is  worked  out  to  meet  the  situation.  Normal 
progress  depends  on  the  direction  in  which  surplus 
energy  goes,  and  if  there  is  a  law  determining  its  out- 
put, the  movement  away  from  pain  due  to  elimination 
assumes  a  definite  direction  and  gives  to  progress  a 
well-defined  goal. 

Activity  is  prompted  either  by  desires  or  impulses. 
Desires  grow  until  enough  activity  is  generated  to  over- 
come the  obstacles,  and  the  pains  of  the  process  are 
offset  by  the  pleasures  of  acquisition  and  satisfaction. 
On  the  mental  side  they  force  a  concentration  of 
pleasures  and  activities ;  and  on  the  physical  side 
they  promote  mechanical  action  and  the  economy  of 
structure  through  which  the  pains  of  concentrated 
activity  may  be  reduced.  This  concentration  of  wants 
and  activities,  forced  upon  men  by  the  obstacles  of  a 
partial  adjustment,  reduces  the  pleasure  both  of  con- 
sumption and  activity.  It  is  a  well-known  law  that  the 
increased  consumption  of  commodities  gives  decreasing 
pleasure.  Concentrated  activity,  likewise,  is  decreas- 
ingly  pleasurable  ;  it  soon  becomes  mere  work,  and  thus 
is  transformed  into  pain.  Desires  consequently  tend  to 
decrease  pleasure  by  forcing  a  concentration  of  wants 
and  activities;  and  they  would  be  an  evil  if  their  growth 


196  The  Theory  of  Prosperity 

were  not  due  to  an  elimination  that  for  the  survivors 
reduces  pain  and  frees  surplus  energy.  But  the  loss 
through  concentration  is  more  than  offset,  because  the 
units  of  commodity,  while  giving  less  pleasure,  are 
increasing  in  number. 

Physical  adaptation  ends  in  an  economy  of  structure 
and  a  concentration  of  wants  and  activities.  The  habit- 
ual acts  of  men  draw  off  considerable  energy,  and  are 
the  first  tax  on  it,  all  energy  less  than  the  ordinary 
amount  being  directed  to  these  conventional  channels. 
Surplus  energy,  however,  seeks  new  channels,  creating 
new  motor  reactions  and  new  wants  of  increased 
urgency.  Increasing  vitality  goes  out  in  new  lines 
and  creates  new  powers  and  satisfactions,  while  decreas- 
ing vitality  dwarfs  the  new  powers  and  concentrates 
energy  in  the  older  channels  of  exit  that  have  become 
the  lines  of  least  resistance.  Here  the  law  of  decreas- 
ing utility  acts,  because  additional  units  of  commodity 
supply  wants  that  are  already  partly  satisfied.  The 
wants  created  by  surplus  energy  have  no  such  limit. 
Each  addition  to  the  fund  of  energy  going  out  in 
new  channels  encourages  new  activities  and  supplies 
new  wants.  There  is  thus  a  natural  pressure  to  do  new 
things  and  to  consume  new  articles.  Only  the  presence 
of  obstacles  and  pains  forces  a  concentration  of  wants 
and  activities.  The  newer  powers  then  suffer  more 
than  the  older  habitual  activities,  and  thus  cause  a 
reversion  to  earlier  types.  The  normal  man  moves 
away  from  primitive  men  because  he  is  adjusting  him- 
self to  new  and  better  conditions,  and  is  made  normal 
by  these  tendencies.  He  adds  to  his  vitality  through  his 
better  adjustment,  and  thus  is  able  to  expand  his  wants 


Income  as  Increased  by  Adjustment  197 

and  activities,  through  which  a  still  better  adjustment 
is  attained.  There  is  thus  a  differentiation  going  on 
between  those  of  decreasing  and  increasing  vitality. 
More  vitality  develops  normality  ;  less  vitality  impels 
toward  abnormality.  The  newer  powers  suffer  from 
a  decrease  of  surplus  energy.  Wants  and  activities 
are  thus  concentrated,  and  survival  is  possible  only 
by  moving  into  a  simpler  environment,  where  the 
older  and  more  habitual  forms  of  activity  command 
success.  Vitality  forces  a  choice  of  environments  har- 
monizing with  its  amount.  It  may  also  lead  to  an 
increase  of  anabolic  habits,  with  degeneration,  rever- 
sion, and  depravity  as  consequences.  All  these  are 
involved  in  retrogression,  and  are  different  names  for 
the  same  process.  A  concentration  of  wants  takes 
place  only  in  an  unfavorable  environment,  with  an 
increasing  number  of  obstacles  to  surmount.  Deprav- 
ity is  excessive  attention  to  these  absorbing  wants, 
and  an  aversion  to  it  must  be  a  part  of  all  tendencies 
that  expand  wants  and  activities.  Growing  desires  also 
cause  a  greater  absorption  of  nutriment  and  a  weaken- 
ing of  the  motives  to  activity.  If  these  anabolic  ten- 
dencies continue,  the  organism  becomes  sluggish  and 
sinks  back  into  some  simpler  environment,  where  less 
activity  is  demanded ;  if  reversion  is  not  possible,  it 
becomes  a  parasite,  getting  its  nutriment  from  an  active 
host  and  thus  reducing  the  need  of  activity.  Anabolic 
variations  among  men  are  the  cause  of  the  social  parasit- 
ism, since  improving  conditions  allow  those  with  con- 
centrated wants  to  become  dependent  and  lose  their 
vigor.  Selection  must  therefore  favor  the  growth  of 
katabolic  habits.  In  each  new  equilibrium  man  is  more 


198  The  Theory  of  Prosperity 

energetic,  while  nature  and  society  to  a  greater  degree 
become  a  storehouse  in  which  the  waste  of  activity  can 
be  repaired.  The  abnormal  thus  tend  to  become  more 
abnormal  through  the  growth  of  anabolic  habits,  while 
the  normal  increase  their  normality  through  the  growth 
of  energy  and  a  closer  adjustment  to  nature. 

There  is  thus  a  progress  by  the  concentration  of 
wants  and  activities  which,  forcing  men  deficient  in 
vitality  into  simpler  situations,  leaves  those  with  more 
vitality  better  opportunities  to  develop.  There  is  also 
by  the  expansion  of  wants  and  activities  a  progress  in 
which  there  is  no  elimination  of  individuals.  Men  with 
increasing  vitality  escape  competition  because  the  press- 
ure of  their  wants  and  activities  forces  them  into  new 
situations.  In  this  case  there  is  a  natural  selection  of 
environments  corresponding  to  the  natural  selection 
of  individuals  in  the  other.  Men  of  energy  constantly 
discard  poorer  situations,  just  as  men  without  energy 
seek  them  or  tend  toward  parasitism.  The  pressure  of 
expanding  wants  and  activities  is  thus  an  independent 
factor  in  progress,  and  is  a  force  wherever  the  increase 
of  energy  disturbing  the  normal  equilibrium  impels  men 
toward  the  better  adjustment  of  a  broader  environment. 
Between  these  two  lies  a  third  form  of  progress,  —  prog- 
ress by  influence.  Many  who  would  not  of  themselves 
break  with  their  environment  are  carried  along  with  a 
forward  movement.  A  nation  may  progress  steadily, 
even  if  but  a  few  persons  are  stimulated  by  increasing 
energy  to  an  expansion  of  wants  and  activities.  Then 
progress  by  influence  affects  other  persons  and  creates 
standards  to  which  all  men  aspire. 

Evolution  on  its  organic  side  predicates  a  rapid  rate 


Incomt  as  Increased  by  Adjustment  199 

of  increase  and  an  inherent  tendency  to  vary  in  all  or- 
ganisms. Place  these  organisms  in  a  fixed  environ- 
ment and  the  ensuing  struggle  develops  an  economy 
of  structure  and  the  growth  of  useful  qualities.  The 
eliminating  force  lies  in  obstacles  that  the  economy  of 
structure  and  the  concentration  of  desires  tend  to  over- 
come. The  acme  of  this  economy  and  concentration 
is  the  normal  which  leaves  out  every  non-essential  to 
present  existence. 

Since  its  primary  impulse  is  toward  the  pleasurable, 
increasing  energy  does  not  have  its  direction  determined 
by  these  laws.  Its  action  lacks  the  economy  of  the 
normal,  because  it  makes  its  exit  through  the  non-devel- 
oped as  well  as  through  the  developed  parts  of  the 
body.  In  the  present  situation,  this  growth  of  non- 
essentials  is  useless.  Their  usefulness  comes  from  the 
impetus  they  give  to  seek  new  situations  where  the 
pleasurable  activities  are  also  useful.  Men  change 
environments  to  get  an  outlet  for  surplus  energy ;  they 
change  commodities,  mechanisms,  food,  and  other  par- 
ticulars to  get  the  economy  that  prevents  elimination. 
The  one  is  a  progress  toward  the  ideal  through  expan- 
sion ;  the  other  is  a  movement  toward  the  normal 
through  economy  and  concentration.  There  is  thus 
a  progress  through  the  selection  of  individuals  and  also 
a  progress  through  the  selection  of  environments.  The 
one  leads  to  the  perfection  of  economy ;  the  other  to 
the  perfection  of  energy.  Social  integration  demands 
both  normal  standards  and  ideal  ends  so  that  the  useful 
may  become  the  pleasurable,  and  the  pleasurable  at  the 
same  time  may  become  the  useful.  Where  both  these 
tendencies  are  in  operation,  the  social  surplus  grows. 


2OO  The  Theory  of  Prosperity 

But  where  there  are  obstacles  to  be  overcome,  the 
desires  grow  until  the  energies  are  sufficiently  concen- 
trated to  force  an  economy  of  structure  by  which  the 
pain  of  the  useful  action  is  reduced.  The  desires  are 
thus  cost  eliminators  and  attain  strength  enough  to 
effect  the  economy  and  elimination  that  are  their  end. 
Any  surplus  pleasure  is  transformed  into  free  energy 
which  impels  its  possessor  to  expand  his  wants  and 
activities  in  the  direction  of  the  ideal. 

Partial  adjustment  has  thus  its  pains  and  its  com- 
pensations in  satisfaction,  and  it  yields  a  surplus  increas- 
ing as  action  becomes  normal.  In  addition  to  this 
surplus,  every  increase  of  energy  creates  a  self-perpet- 
uating surplus  from  which  there  are  no  deductions. 
Complete  adjustment  has  nothing  but  pleasurable 
activity.  Normal  standards  are  transformed  into  ideals, 
and  thus  a  goal  is  set  that  gives  a  definite  end  to 
activity.  The  pleasurable  becomes  increasingly  useful, 
as  these  ideals  are  attained  through  environmental 
changes.  Clear  ideals  are  thus  the  great  source  of  the 
surplus,  since  they  give  a  direction  to  progress  im- 
possible to  secure  from  any  economy  of  structure  or 
elimination  of  the  unfit. 

Social  Reason    is    apparently  the  highest  stage  of    human 

ln2'  development,  and  thus  becomes  the  criterion  of  truth 
and  right  living.  Viewed,  however,  as  a  part  of  the 
evolutionary  process,  it  does  its  work  more  or  less 
imperfectly,  as  do  all  developing  faculties.  In  this 
light,  it  is  one  of  the  results  of  indirect  activity,  and 
a  complement  of  desire  growing  perfect  in  the  regions 
where  desires  dominate. 

When  obstacles  to   success  must  be  surmounted  by 


Income  as  Increased  by  Adjustment  20 1 

indirect  opposition,  the  initial  change  is  a  growth 
of  desire  to  meet  the  situation.  If  certain  satisfac- 
tions are  delayed  or  prevented,  particular  desires  must 
grow  until  the  activities  are  so  concentrated  that 
the  goods  giving  these  satisfactions  are  produced. 
Were  all  indirect  opposition  met  in  this  simple  manner, 
the  process  of  adjustment  to  new  situations  would  take 
a  long  time.  Psychic  reactions  are  of  slow  growth,  and 
when  made  are  changed  with  even  greater  difficulty. 
Reasoning,  however,  by  increasing  the  indirectness  of 
action,  reduces  the  necessity  of  strong  desires  and  a  con- 
sequent concentration  of  activities.  In  direct  attack,  fail- 
ure and  probable  elimination  result  if  some  one  activity 
is  not  vigorous  enough  to  meet  the  situation.  Indirect 
attack  utilizes  several  activities,  none  of  which  need  be  so 
strong  as  the  one  made  use  of  in  direct  attack.  The  de- 
sires that  stimulate  these  activities  are,  therefore,  more 
varied  and  individually  weaker  than  the  passion  that 
aroused  the  one  activity  needed  for  direct  attack. 
When  reasoning  supplements  desire  and  points  out 
still  more  indirect  methods  of  approach,  the  number 
of  useful  activities  is  again  increased  and  each  of 
them  may  be  weaker  than  if  the  situation  were  met 
solely  by  a  growth  of  desire. 

So,  also,  when  the  environment  is  altered  the  old 
desires  remain,  creating  cravings  for  their  satisfaction. 
If  a  change  in  desires  were  the  only  method  of  adjust- 
ment, a  painful  evolutionary  process  would  be  neces- 
sary until  the  old  desires  had  disappeared  and  others 
had  been  substituted  for  them.  The  man  would  have 
different  wants,  but  no  more  of  them  ;  he  would  have 
changed  but  not  progressed.  The  use  of  tools,  increase 


2O2  The  Theory  of  Prosperity 

of  capital,  growth  of  commerce,  and  improvements  in 
agriculture,  however,  allow  old  wants  to  be  supplied  in 
new  situations.  The  number  of  pressing  wants  is  thus 
increased,  the  concentration  of  wants  and  activities  is 
less  marked,  and  the  desires  are  not  so  strong  as  if 
more  direct  methods  of  approach  were  used.  Reason- 
ing furnishes  a  ready  and  easy  method  of  adjustment 
to  new  situations  which  it  would  take  ages  to  bring 
about  if  they  were  met  by  the  slow  growth  of  desire. 

Reasoning  and  desire,  therefore,  are  due  to  indirect 
opposition,  and  their  presence  shows  that  adjustment  is 
but  partial.  An  obstacle  to  success  is  needed  to  arouse 
desire,  and  the  pain  of  non-satisfaction  stimulates  reason- 
ing. The  premises  from  which  the  reasoning  proceeds 
are  connected  with  the  obstacle  that  arouses  desire. 
Every  situation  is  simplified  by  reasoning,  until  only 
the  essential  features  of  the  opposition  to  the  satisfac- 
tion of  desire  are  apparent,  and  then  a  weaker  desire  or 
several  lesser  desires  can  concentrate  the  activities 
enough  to  remove  the  obstacle  and  to  bring  the  satis- 
faction that  the  desires  crave.  Hence,  the  particular 
conditions  of  each  environment  determine  the  strength 
of  desire  and  the  clearness  of  reasoning.  When  reason- 
ing is  once  developed,  it  may  be  used  in  many  fields  ; 
when  desires  spring  up  in  local  situations,  they  may  be 
kept  alive  in  many  other  situations,  but  the  clearness 
of  reasoning  is  fixed  by  the  original  situation  where 
its  exercise  is  a  condition  of  survival,  and  this  situation 
also  fixes  the  strength  of  desire. 

Indirect  action,  therefore,  has  three  primary  laws. 
First,  desire  must  be  strong  enough  to  concentrate  the 
activities  sufficiently  to  overcome  the  obstacles  to  success. 


Income  as  Increased  by  Adjustment  203 

Second,  the  power  of  reasoning  must  be  sufficient  to 
eliminate  errors  in  choosing  the  easiest  path  to  over- 
come the  obstacle.  Desire  thus  creates  the  motive  of 
approach,  while  reason  points  out  the  path.  The  third 
law  is  that  persons  with  the  same  desires  hold  the  same 
premises.  Such  persons  have  a  common  environment 
and  the  same  obstacles  to  overcome.  Desires,  it  must 
be  remembered,  are  wants  concentrated  to  meet  local 
conditions.  Premises  for  reasoning  come  from  a  clear 
perception  of  the  obstacles  that  concentrate  wants 
in  these  situations.  Desire  and  reasoning,  therefore, 
cannot  be  separated.  They  have  the  same  causes,  are 
due  to  indirect  activity,  and  are  parts  of  the  partial 
adjustment  that  appears  when  obstacles  to  success  must 
be  overcome. 

Individuals  thus  come  into  societies  with  desires  and 
premises  that  result  from  the  evolutionary  process  of 
which  they  and  their  class  are  products.  This  reason- 
ing is  correct  enough  to  furnish  an  adequate  guide  to 
individual  conduct ;  and  those  having  common  desires 
and  premises  can  discuss  with  each  other  and  unite  upon 
standards  that  have  a  rational  basis.  For  individuals, 
and  for  single  classes,  reasoning  may  become  a  guide  to 
action,  but  it  cannot  arbitrate  between  classes.  It  is  the 
essence  of  class  or  race  differences  that  the  members 
of  each  group  have  desires  and  activities  peculiar  to 
particular  situations.  Each  environment  creates  a  con- 
centration of  wants  to  meet  the  special  obstacles  it 
forces  men  to  surmount,  and  their  premises  harmonize 
with  these  desires.  There  can  be  no  common  premises 
to  all  these  groups  because  there  are  no  common  desires, 
or,  at  least,  the  premises  of  each  group  are  partly  differ- 


204  The   Theory  of  Prosperity 

ent  because  their  desires  are  not  the  same.  As  soon, 
therefore,  as  a  united  society  develops  among  different 
classes  or  races,  common  premises  disappear,  leaving 
it  in  a  position  where  passion  and  struggle  must  settle 
class  and  race  conflicts. 

The  concentration  of  wants  and  activities  out  of  which 
reasoning  springs  is  due  to  the  obstacles  of  a  partial 
adjustment.  Opposed  to  this  type  of  progress  is  that 
due  to  the  expansion  of  wants  and  activities.  The 
surplus  energy  goes  out  in  new  channels,  and  by  this 
energy  impulses  are  created  that  press  on  to  a  complete 
adjustment.  Each  new  outlet  of  surplus  energy  stimu- 
lates some  ideal  and  an  activity  to  realize  it,  so  that 
new  ideals  and  impulses  appear  with  each  expansion  of 
wants  and  activities.  In  a  complex  society  with  differ- 
ent classes,  the  surplus  energy  of  all  of  them  will  go 
out  in  the  same  direction  —  the  line  of  least  resistance 
in  the  new  environment.  The  new  ideals  and  impulses 
of  all  classes  will  be  the  same  because  due  to  present 
conditions.  But  the  old  desires  and  the  old  premises 
will  be  different,  for  each  class  or  race  has  those  that 
developed  in  earlier  situations.  The  rational,  based 
as  it  is  on  past  conditions,  will,  therefore,  fail  to  give 
a  solution  to  social  problems  or  to  furnish  a  basis  upon 
which  classes  or  races  can  unite.  The  new  impulses 
and  ideals  being  all  that  great  races  have  in  common, 
social  problems  must  be  treated  from  the  standpoint  of 
complete  adjustment.  To  passion  and  conflict  there  is 
no  check,  except  in  the  growth  of  common  impulses  and 
ideals.  Social  harmony  lies  in  what  the  race  has  before 
it,  and  not  in  that  through  which  its  component  ele- 
ments have  individually  passed. 


Income  as  Increased  by  Adjustment  205 

Let  me  restate  this  thought,  starting  from  a  more 
elementary  principle.  If  vitality  is  increasing,  the  sur-' 
plus  energy  seeks  new  outlets  and  brings  society  into 
accord  by  giving  to  its  members  hopes  and  aims  in 
harmony  with  existing  conditions.  They  all  move  in 
the  direction  of  the  pleasurable,  making  it  the  useful 
by  forcing  environmental  changes.  If,  however,  the 
vitality  of  individuals  or  classes  is  decreasing,  they  re- 
strict their  activities  and  concentrate  their  attention  on 
the  part  of  the  environment  made  vivid  by  their  hered- 
ity, and  reason  about  it  until  its  features  are  transformed 
into  clearly  defined  premises,  the  use  of  which  gives 
greater  economy  to  action.  This  tendency  to  return  to 
antecedent  conditions  favors  social  disintegration,  and 
so  develops  a  hopeless  philosophy.  Clear,  shrewd 
reasoning,  egoistic  action,  and  a  pessimistic  tone  result 
from  the  depression  of  a  losing  conflict,  which  gives  to 
the  defeated  no  escape  but  through  a  retreat  to  a  more 
restricted  environment.  A  dialectical  civilization  or 
party  is  always  disintegrating.  Each  class  falls  back 
on  its  primary  instincts  and  traditions,  and  these  relate 
to  the  local  conditions  under  which  the  class  originated. 
In  disintegration  there  appear  as  many  groups  and  as 
many  distinct  types  of  reasoning  as  there  were  original 
elements  out  of  which  the  society  sprang.  Even  in  the 
most  progressive  societies,  some  classes  and  individuals 
are  withdrawing  from  open  conflict  because  of  reduced 
vitality  ;  others  are  using  their  surplus  energy  to  enter 
a  larger  environment.  The  first  class  emphasizes  desire 
and  reason  ;  the  second  develops  the  impulses  and  ideals 
which  the  larger  situation  demands.  Society  thus  dis- 
integrates on  the  side  of  desire  and  integrates  on  that 


206  The   Theory  of  Prosperity 

of  impulse.  Desires  are  the  outcome  of  past  conditions 
and  local  situations,  and  as  they  become  prominent  they 
isolate  men  into  the  elementary  groups  out  of  which 
society  came.  Impulses  spring  from  the  new  situation 
acquired  through  surplus  energy.  They  blend  the 
isolating  elements  and  give  a  prominence  to  the  new 
and  the  general  toward  which  society  is  moving.  Peo- 
ple sinking  in  vitality  hold  tenaciously  to  old  dogmas, 
while  those  increasing  in  vitality  believe  in  doctrines 
giving  scope  to  their  growing  energy.  The  latter 
will  reject  old  truths  because  their  increased  vitality 
causes  them  to  test  the  situations  which  block  the  way 
to  new  activities.  This  class  will  believe  in  what  they 
are  doing ;  the  other  in  what  they  have  done.  A  pro- 
gressive group  is  always  united,  because  the  beliefs  of 
its  members  come  from  their  acts  and  impulses;  a  sta- 
tionary group  falls  apart  through  the  tendency  of  each 
faction  to  emphasize  a  past  in  which  other  groups  did 
not  participate. 

In  his  "  Social  Evolution,"  Mr.  Kidd  affirms  that  rational 
conduct  fails  to  create  social  progress,  and  that  religion 
has  been  the  power  uniting  men  and  causing  them  to 
subordinate  their  individual  interests  to  general  welfare. 
This  doctrine  harmonizes  with  the  thought  that  the 
desires  and  the  reasoning  based  upon  them  are  socially 
disintegrating.  Individual  passions  can  be  suppressed 
by  reasoning ;  all  their  elements  lie  in  one  conscious- 
ness, and  clear  reasoning  can  subordinate  the  less 
essential  to  the  more  important.  Social  passions  can- 
not be  checked  in  this  fashion.  There  is  no  one  con- 
sciousness in  which  all  feeling  centres.  The  different 
groups  do  not  have  the  same  desires,  because  those  of 


Income  as  Increased  by  Adjustment  207 

each  group  had  their  origin  in  particular  local  condi- 
tions. The  premises  of  the  groups  will  not  match,  and 
their  utilitarian  calculus  will  vary  with  the  kind  and 
intensity  of  their  desires.  Each  group  reasons  accu- 
rately and  sums  up  its  pleasures  with  equal  facility  ;  but 
premises  and  desires  differing,  no  common  conclusion 
can  be  reached.  Rationalism  fails  in  a  complex  society 
because  there  are  no  common  premises,  nor  is  there  any 
general  utilitarian  calculus.  The  seemingly  general 
principles  are,  after  all,  not  universal,  and  when  an 
attempt  is  made  to  enforce  them,  struggle  and  disrup- 
tion follow. 

The  victories  of  religion  are  in  complex  societies. 
The  great  religions  emphasize  the  impulses  of  men  and 
thus  unite  men  on  the  issues  where  progress  is  pos- 
sible. The  standpoint  of  partial  adjustment  can  do 
nothing  to  placate  struggle  and  conflict  between  classes 
and  races.  Only  in  the  ideals  and  impulses  of  com- 
plete adjustment  does  harmony  exist.  For  things  social 
there  is  either  no  adjustment  or  complete  adjustment. 
In  family  life,  for  example,  the  desires  of  men  and 
women  are  not  all  in  common,  and  their  environment 
cannot  be  the  same.  A  man  and  wife  can  therefore 
argue  endlessly  on  this  basis,  with  no  other  result  than 
the  disruption  of  the  family.  For  those  who  are  partly 
different  there  is  no  rational  basis  of  agreement. 

In  politics  rational  principles  succeed  only  in  simple 
societies  where  no  distinct  classes  exist.  A  common 
environment  and  common  desires  create  a  united  race 
and  a  rational  basis  of  action.  But  when  the  bounda- 
ries of  the  original  situation  are  passed,  and  those  having 
other  desires  are  incorporated  into  the  nation,  the  old 


208  The  TJicory  of  Prosperity 

basis  of  unity  is  gone.  In  America,  for  example,  the 
descendants  of  the  Puritans  do  not  have  the  same  de- 
sires, and  therefore  do  not  reason  in  the  same  fashion  as 
the  Irish,  the  German,  the  Italian,  and  others  that  have 
been  admitted  to  citizenship.  Any  rational  campaign 
based  on  the  accepted  principles  and  traditions  of  par- 
ticular classes  tends  toward  social  disintegration.  It  is 
only  the  newer  impulses  and  ideals  which  all  have  in 
common  that  serve  as  a  basis  of  unity.  Men  must  be 
idealized  until  all  differences  disappear;  the  national 
environment  must  have  its  general  features  emphasized 
until  the  peculiarities  of  locality  sink  out  of  view ;  the 
misery  of  cities  and  the  hardships  of  country  must  be 
lost  sight  of  in  the  fresher  view  of  life  that  art  and 
nature  arouse.  There  is  nothing  but  disruption  in  the 
premises  of  isolating  desires  or  in  the  local  traditions  of 
the  incorporated  factions. 

There  is  in  all  this  a  single  principle  so  important 
that  it  needs  renewed  emphasis.  Reasoning  is  based 
on  the  concrete  conditions  that  create  obstacles  to  satis- 
faction. Being  bound  up  with  desire,  it  reflects  the  stand- 
point of  partial  adjustment,  and  fails,  therefore,  to  unite 
classes  and  races  when  these  must  be  blended  into 
larger  groups.  It  resembles  parasitism,  because  it  im- 
poses on  those  who  doubt  its  premises  the  difficulty 
and  danger  of  testing  them.  Only  those  with  free 
energy  dash  against  the  obstacles  they  represent  and 
thus  discover  whether  or  not  they  are  parts  of  the  real 
environment.  The  reasoner  is  less  active  than  the 
doer,  and  depends  upon  him  for  present  adjustment. 
When  a  member  of  a  group  or  society,  it  acts  while 
he  protests,  and  thus  he  enjoys  without  effort  what 


Income  as  Increased  by  Adjustment  209 

others  gain.  Individual  progress  goes  from  passion 
to  desire  and  ends  in  the  rational  and  normal,  while 
social  progress  goes  direct  from  passion  to  impulse  and 
ends  in  the  ideal  and  perfect.  Every  individual  and 
nation  must  go  through  both  kinds  of  progress,  which 
must,  however,  be  kept  distinct.  It  is  a  bad  rationalism 
that  seeks  to  dispute  with  others  about  their  desires, 
or  that  tries  to  force  on  them  premises  not  given  by 
their  own  environment  nor  coming  from  their  race  ex- 
periences. It  is  an  equally  bad  idealism  that  tries  to 
dictate  about  present  conditions,  or  to  force  men  to 
ignore  the  warnings  which  the  desires  give  of  the  exist- 
ing evils.  The  standpoints  of  a  partial  adjustment  and 
of  a  complete  adjustment  must  exist  side  by  side  and 
exert  an  influence  on  acts  in  their  own  sphere.  Men 
should  reason  where  they  are  alike,  but  where  they  dif- 
fer they  must  have  impulses  to  move  them  toward 
some  common  goal. 


CHAPTER   III 

INCOME  AS  MODIFIED  BY  ECONOMIC  RIGHTS 

The  source  IF  economic  forces  alone  controlled  the  disposition  of 
income,  the  problem  of  distribution  would  be  simple. 
As  prosperity  increased  productive  power,  a  rise  in  the 
margin  of  consumption  would  socialize  the  increased 
income.  The  absence  of  the  power  of  substitution 
might  at  first  create  rent,  and  the  force  of  tradition 
might  hold  men  to  old  forms  of  activity  thus  leading  to 
exploitation  ;  but  the  power  of  substitution  would  finally 
be  restored,  and  the  old  traditions  would  break  down  or 
be  replaced  by  others  in  harmony  with  present  condi- 
tions. The  gradual  equalization  of  income  cannot  be 
prevented  by  rent  nor  exploitation ;  they  are  checks,  but 
not  bars  to  progress.  When  a  homogeneous  race  is  in 
touch  with  a  fixed  environment,  economic  equality  is 
sure  to  be  attained.  Prosperity,  therefore,  means 
social  progress  so  long  as  the  only  forces  in  operation 
are  economic.  But  when  race  differences  enter,  the 
rational  basis  of  equality  fails  to  preserve  unity,  because 
there  are  few  common  desires,  and  the  traditions  of 
each  race  or  class  are  the  result  of  its  past  conditions. 
The  surplus  energy  that  would  have  gone  into  new 
channels  is  consumed  in  struggle  and  conflict. 

There  is  no  check  to  passion  and  conflict  except 
through  the  growth  of  common  impulses.  Race  im- 
pulses are  vital,  not  rational,  and  depend  upon  superior 


Income  as  Modified  by  Economic  Rights       21 1 

vitality  and  surplus  energy.  Increase  the  vitality  and 
the  surplus  energy  of  all  will  go  out  in  directions  fixed 
by  the  present  environment,  so  that  the  new  impulses 
will  be  felt  by  all  who  participate  in  prosperity  and  thus 
share  in  the  increased  vitality  it  brings.  These  impulses 
are  the  only  forces  holding  diverse  races  and  classes  in 
unity  ;  the  smaller  groups  are  held  together  by  tradi- 
tion and  desire.  For  these  groups  the  standpoint  of 
partial  adjustment  with  its  utilitarian  calculus  suffices, 
while  the  larger  unity  of  races  and  classes  is  formed  by 
a  movement  direct  from  passion  and  conflict  to  the 
equilibrium  of  complete  adjustment.  Surplus  energy 
moves  toward  the  pleasurable  —  the  new  that  has  no 
alloy  of  pain;  and  this  is  the  ideal  of  complete 
adjustment. 

Individual  progress  starts  with  the  perception  of  an 
obstacle  to  surmount;  there  is  a  pain  followed  by  a 
desire,  and  a  rational  procedure  is  devised  to  avoid  the 
pain  and  to  satisfy  the  desire.  The  movement  that 
safeguards  against  the  pains  of  the  environment  ends  in 
a  moral  code,  and  is  the  goal  of  individual  progress  ;  but 
social  progress  starts  from  new  resources  creating  addi- 
tional income.  More  vitality  and  surplus  energy  is 
created,  a  new  impulse  to  activity  is  formed,  and  then,  as 
the  goal  of  action,  an  ideal  appears  which  is  formulated 
as  a  right  when  there  is  an  impulse  to  enforce  it.  As 
morality  is  the  safeguard  from  evil,  so  rights  are  safe- 
guards to  the  outlets  of  surplus  energy,  and  have  the 
same  place  in  social  progress  that  the  moral  code  has 
in  individual  progress.  Prosperity  ends  in  the  assertion 
of  rights  for  the  same  reasons  that  adversity  ends  in  a 
new  formulation  of  moral  rules.  Rights  and  morality 


212  The  Theory  of  Prosperity 

thus  complement  each  other;  the  one  protecting  the 
pleasure  of  activity,  and  the  other  avoiding  the  pain 
of  non-adjustment.  Hence,  rights  stand  in  the  same 
relation  to  ideal  action  that  the  moral  code  does  to 
normal  action. 

In  a  complex  nation  like  the  American,  there  is  no 
rational  principle  uniting  the  various  classes,  sections, 
and  races.  Each  class  has  its  own  needs,  each  section 
has  its  own  peculiarities  evoking  particular  desires,  and 
each  race  has  its  own  heredity.  No  class  becomes  large 
enough  to  dominate ;  no  section  is  so  important  that 
the  others  must  yield ;  nor  is  any  race  so  superior  that 
it  can  impose  its  heredity  and  tradition  on  the  nation. 
There  is,  therefore,  no  rational  source  of  unity.  Each 
state  or  group  of  similar  states  has  its  own  environment 
and  develops  desires  that  fit  its  situation;  and  the  rational 
code  of  each  region  conforming  to  these  conditions  can 
have  little  force  beyond  its  boundaries.  But  common  to 
all  are  the  new  impulses  that  prosperity  brings,  and  from 
them  will  come  the  forces  creating  national  unity. 

The  labor  situation  has  dangers  because  neither  party 
to  the  conflict  it  creates  is  strong  enough  to  dominate. 
In  particular  industries  or  localities  one  of  the  parties 
may  suppress  the  other;  and  if  this  region  were  a 
nation,  a  group  of  common  principles  might  gain  accept- 
ance. But  no  matter  how  large  the  industry  or  region, 
it  is  only  a  part  of  the  Union,  and  its  tendencies  are 
counteracted  by  the  conflicting  tendencies  of  other 
regions.  Therefore,  a  new  tradition  cannot  arise, 
since  the  laborers  are  in  the  main  controlled  by  the 
traditions  of  past  exploitation  while  the  employers  are 
dominated  by  those  of  self-made  men.  Between  the 


Income  as  Modified  by  Economic  Rights       213 

pessimism  of  the  one  and  the  optimism  of  the  other 
there  is  no  basis  for  unity. 

In  the  transformation  that  is  now  going  on,  by  which 
a  new  nation  is  being  superimposed  on  the  traditions 
of  locality,  class,  and  race,  there  is  little  hope  from  the 
direct  play  of  economic  forces.  The  social  surplus  may 
be  secured  by  workmen,  monopolists,  or  investors ;  but 
there  is  no  fixed  division  of  income  separating  it  into 
funds  predetermined  for  the  use  of  a  special  class. 
A  theory  of  prosperity  may  be  worked  out  from  any 
of  these  viewpoints ;  and  if  the  viewpoint  is  consist- 
ently held,  all  the  essentials  of  prosperity  may  be  made 
clear.  But  the  conditions  of  prosperity  give  little  clew 
to  the  distribution  of  wealth.  Where  race  and  class  con- 
flicts enter  to  disturb  the  natural  flow  of  income,  little 
light  is  thrown  on  distribution  by  a  knowledge  of  existing 
conditions.  Harmony  and  unity  come  from  other  causes. 

In  each  locality  and  class  a  group  of  desires  in  har- 
mony with  the  local  environment  must  displace  or 
modify  the  old  desires  upon  which  the  existing  tradition 
is  based.  There  will  then  develop  a  new  moral  code, 
local  in  character,  and  yet  general  enough  to  induce 
large  bodies  of  men  to  accept  it.  A  rational  procedure 
based  on  the  desires  can  thus  reconstruct  race  tradi- 
tions, and  unite  men  into  groups  with  a  basis  in  the 
present  environment.  Beyond  this,  rationalism  cannot 
go.  But  it  may  be  supplemented  by  impulses  due  to 
the  surplus  energy  that  prosperity  creates ;  and  these 
impulses,  going  out  in  the  same  direction,  form  ideals 
and  superimpose  on  the  local  codes  rights  that  all 
classes  will  accept.  The  local,  class,  and  sectional 
forces  making  for  unity  are  moral  ;  the  general  forces 


214  The   Theory  of  Prosperity 

are  impulses  and  ideals  formulated  as  rights.  It  is  not, 
therefore,  from  a  theory  of  distribution  that  a  solution 
of  present  difficulties  will  come,  but  from  a  better  for- 
mulation of  the  moral  code  and  from  a  clearer  perception 
of  the  common  rights  that  new  impulses  and  ideals 
evoke.  Economic  analysis  will  show  the  causes  of 
prosperity ;  but  prosperity  must  cause  surplus  energy  to 
go  out  in  natural  channels  before  useful  checks  to  action 
and  pleasurable  modes  of  activity  become  apparent. 

There  are  many  indications  of  progress  in  both  these 
directions.  In  each  section  and  class  a  new  morality 
is  building  safeguards  against  local,  class,  and  party 
evils.  New  rights  are  also  gaining  recognition,  even 
if  they  have  not  been  formulated  and  consciously 
accepted.  We  should  look  for  these,  not  where  strife 
and  party  conflict  force  unsolved  problems  on  the  atten- 
tion of  the  public,  but  rather  upon  those  occasions  and 
moments  when  great  prosperity  induces  men  and 
classes  to  lay  aside  the  armor  of  struggle  and  to  be 
natural  because  they  are  successful.  A  capitalist  is 
rational  and  pugnacious  in  conflict,  but  generous  and 
impulsive  in  giving.  A  corporation  is  reactionary  in 
adversity,  but  sets  better  standards  when  success  is 
assured.  A  party  is  made  moral  and  rational  by  de- 
feat; it  represents  the  national  impulse  only  in  moments 
of  victory.  The  ideals  of  laborers  are  not  shown  in  a 
strike,  but  at  times  when  they  are  organizing  for  mutual 
advantage.  The  progressive  element  of  city  life  comes 
to  the  front,  not  in  struggle  with  corruption,  but  in  the 
many  voluntary  associations  that  men  enter  from  a  love 
of  their  locality.  Each  new  organization  represents 
some  incipient  ideal  which,  when  clearly  perceived,  be- 


Income  as  Modified  by  Economic  Rights       215 

comes  a  right  that  all  enjoy.  Economic  rights  are  born 
of  adjustment,  not  of  struggle.  Being  the  emotions  of 
success,  they  are  first  felt  by  men  with  surplus  energy 
and  then  imposed  on  society.  The  income  such  rights 
transfer  comes  directly  from  the  social  surplus  and  so 
makes  no  national  deficit. 

The  rights  upon  which  political  freedom  depends 
have  already  been  worked  out.  They  were  obtained 
by  picturing  a  primitive  society  where  men  were  so 
isolated  that  their  relations  were  simple  and  plain.  The 
problem  of  economic  freedom  is  to  find  a  modern  equiva- 
lent for  the  rights  that  in  earlier  times  went  with  land. 
The  workman  of  to-day  should  have  all  that  the  land- 
owner of  the  past  enjoyed.  Freedom  consists  not 
merely  of  political  rights,  but  is  dependent  upon  the 
possession  of  economic  rights,  freely  recognized  and 
universally  granted  to  each  man  by  his  fellow  citizens. 
These  economic  rights  measure  freedom  in  proportion 
as  there  is  a  mutual  agreement  concerning  their  desira- 
bility, and  as  complete  adjustment  makes  their  reali- 
zation possible.  Only  those  rights  that  American 
conditions  permit  and  the  impulses  of  unimpeded 
activity  may  attain  can  be  properly  considered  ideal. 
I  shall  enumerate  a  few,  which,  at  the  present  time, 
seem  to  be  in  harmony  with  the  forces  making  for 
adjustment,  and  if  so  must  be  incorporated  in  the 
national  thought  and  become  as  clearly  defined  as  are 
political  rights.  The  rights  here  enumerated  will  doubt- 
less be  added  to  as  time  goes  on  and  conditions  of 
adjustment  to  American  environment  improve,  or  as 
that  environment  itself  changes.  For  the  present  they 
may  be  considered  under  the  following  heads  :  — 


216  The  Theory  of  Prosperity 


I.     PUBLIC    OR    MARKET    RIGHTS 

The  right  to  an   open  market.     The  right  to  publicity.     The  right  to 
security.     The  right  to  cooperate. 

The  right  to  A  free  laborer  takes  full  advantage  of  his  industrial 
situation.  Crusoe,  surveying  the  range  of  options, 
worked  in  this  or  that  field  as  his  inclinations  directed. 
The  return  from  his  industry  flowed  to  him  with  equal 
directness.  There  was  no  obstacle  to  his  undertak- 
ing any  enterprise  and  getting  from  it  all  its  return. 
The  small  farmer  or  typical  peasant  had  an  almost 
equal  freedom.  Numerous  opportunities  for  work 
existed  on  his  small  estate  to  which  he  could  resort 
and  from  which  a  full  compensation  was  secured.  Both 
he  and  Crusoe  had  an  open  field.  The  outward  flow  of 
energy  and  the  return  flow  of  goods  were  unobstructed 
and  stood  in  direct  relation  to  each  other.  This  direct- 
ness of  all  primitive  relations  is  lost  in  the  complicated 
conditions  of  modern  industry.  From  each  individual 
there  is  as  before  an  outward  flow  of  energy  and  a 
return  flow  of  goods,  but  between  the  two  exists  a  gap 
which  is  filled  in  by  other  workmen  aiding  in  the  crea- 
tion of  goods.  Each  worker  puts  in  the  industrial 
process  a  product  of  his  own,  and  gets  back  some- 
thing he  has  not  made  or  has  only  partly  made.  This 
process  has  been  often  explained,  and  does  not  need 
description.  The  essential  point  is  that  the  workman, 
instead  of  watching  his  product  slowly  going  through 
its  many  changes  and  finally  claiming  it,  sells  it  in  the 
general  market  and  buys  from  it  whatever  he  needs. 
The  market  thus  stands  for  all  the  unseen  changes 


Income  as  Modified  by  Economic  Rights       217 

taking  place  between  the  day  when  the  laborer  does 
his  work  and  the  day  when  his  final  reward  appears. 
Although  the  changes  in  the  form  of  products  take 
place  beyond  the  gaze  of  the  workman,  his  interest  in 
them  is  none  the  less,  nor  is  the  process  different  from 
the  simple  circuit  of  a  Crusoe  or  a  peasant.  If  the 
proper  amount  of  goods  fails  to  come  back,  the  effects 
are  as  detrimental  as  if  Crusoe  or  the  peasant  were 
deprived  of  their  products.  The  market  is  open  if  the 
goods  return  in  their  proper  amount ;  it  is  closed  or  ob- 
structed if  they  do  not.  For  each  laborer  the  outward 
flow  of  energy  and  the  return  flow  of  goods  must  be 
unimpeded.  The  existence  of  a  market  creates  com- 
plicated industrial  operations,  but  it  should  preserve  the 
simple  relations  enjoyed  by  an  isolated  worker. 

When  each  workman  passes  to  other  workmen  the  The  right  to 
product  of  his  labor,  the  openness  of  the  market  can  be  Publlclt>'- 
insured  only  by  the  right  of  publicity.  He  must  be  able 
to  watch  the  circuit  through  which  his  product  passes 
from  the  time  it  leaves  him  until  it  returns  in  the 
form  of  goods  fit  for  use.  Each  workman  must  assert 
this  right  to  maintain  his  economic  freedom.  Transac- 
tions hidden  from  the  public  view  disturb  the  relations 
between  the  outflow  of  energy  and  the  return  of  goods. 
Those  who  are  exempted  from  inspection  extract  an 
unearned  share  from  the  gross  product  of  industry, 
leaving  the  real  workers  to  struggle  as  best  they  may 
for  the  diminished  remainder.  Unseen  claimants  are 
preferred  creditors  and  get  their  shares  paid  first. 

Security  is  another  right  belonging  to  isolated   pro-  The  right  to 
ducers  which  must  be  fully  preserved  in  modern  indus-  secunt.v- 
try.     The  product  of  a  man's  industry  must  be  left  in 


2 1 8  The  Theory  of  Prosperity 

his  possession,  and  all  his  industrial  relations  must  be 
free  from  arbitrary  changes.  A  bad  monetary  standard 
is  no  less  harmful  than  an  unjust  system  of  taxation. 
Speculation  and  other  arbitrary  changes  in  prices  also 
violate  the  right  of  security  by  forcing  men  to  sell  at 
low  prices  and  to  buy  back  the  final  product  at  high  rates. 
Security,  moreover,  is  not  merely  a  question  of  property 
rights.  It  also  relates  to  utilities  and  activities.  The 
consumer  has  a  right  to  stable  prices  and  the  workman 
to  a  steady  position.  An  arbitrary  discharge  of  work- 
men disturbs  industrial  processes  and  should  be  carefully 
guarded  against. 

The  right  to  Industrial  efficiency  results  from  the  formation  of  pro- 
cooperate.  ductive  groups  whose  members  work  for  common  ends 
but  in  different  ways.  This  division  of  labor,  though 
due  to  objective  conditions",  cannot  be  made  effective 
unless  psychic  changes  in  men  permit  them  to  work  and 
live  in  harmony.  Group  activity,  a  feeling  of  unity,  and 
a  community  of  interests  add  quite  as  much  to  the  effi- 
ciency of  labor  as  do  favorable  conditions.  Cooperation 
is  not  an  objective  relation,  but  a  cohesive  instinct  which 
will  not  be  formed  without  some  flow  of  income  raising 
the  condition  of  the  group  above  the  bare  minimum  of 
existence.  A  group  with  steadily  lowering  wages  will 
not  hold  together.  Social  interests  are  created  by 
upward  movements  in  the  standards  of  living,  through 
which  greater  cohesion  and  more  power  in  struggle  are 
obtained.  The  right  to  cooperate  is  a  right  to  increased 
income. 


Income  as  Modified  by  Economic  Rights        219 


2.    SOCIAL   RIGHTS 

The  right 'to  a  home.  The  right  to  develop.  The  right  to  -wholesome 
standards.  The  right  to  homogeneity  of  population.  The  right  to 
decision  by  public  opinion. 

Marriage  is  a  permanent  cooperation  between  the  The  right  to 
sexes  under  such  conditions  that  its  purity  can  be  main-  a  c 
tained,  and  children  raised  that  will  be  a  credit  to  parents 
and  the  community ;  and  it  involves  everything  needed 
to  secure  these  ends.  There  should  be  no  necessity  of 
living  in  a  social  environment  where  either  party  is 
tempted  to  break  marital  vows,  or  where  the  lack  of 
income  to  support  a  family  prevents  pure  social  rela- 
tions. No  industry  should  be  continued  under  condi- 
tions that  force  the  rate  of  wages  so  low  that  healthy 
children  and  high  standards  are  impossible  or  even  put 
in  jeopardy.  The  right  to  a  home  is  essential  to  a 
pure  social  life,  permanent  sex  relations  demanding  a 
fixed  material  environment  for  each  family.  A  home 
is  not  merely  a  place  in  which  to  sleep  and  eat ;  these 
are  merely  animal  needs.  It  is  a  secluded  retreat  with 
a  standard  of  comfort  above  the  mere  physical  wants ; 
for  without  privacy  and  income  there  is  no  home. 
Marriage  thus  requires  an  income  above  the  individual 
wants  of  the  contracting  parties,  and  the  need  of  this 
additional  income  is  increased  if  the  social  environment 
is  so  bad  that  home  life  must  be  protected  from  the  de- 
grading influences  of  the  locality.  As  soon  as  it  becomes 
questionable  whether  young  people  can  marry  without 
losing  the  social  standards  in  which  they  have  been  reared, 
there  is  an  evil  at  hand  which  society  must  remove  or 
surfer  a  deterioration  that  corrupts  social  well-being. 


22O  The  Theory  of  Prosperity 

The  right  to  Education  has  become  an  essential  feature  of  state  ac- 
develop.  tivity.  Each  generation  should  reach  a  closer  adjustment 
to  its  environment  and  be  able  to  secure  better  conditions 
from  it  than  its  predecessors  enjoyed.  This  means 
that  sons  should  be  better  prepared  for  life,  and  their 
education  should  be  extended  through  a  longer  period. 
The  longer  children  are  in  school,  the  more  complete 
can  this  preparation  be,  and  the  more  efficient  will  they 
be  when  they  enter  the  industrial  world.  Employment 
in  some  narrow  field  cramps  the  physical  and  mental 
development  unless  it  is  entered  so  late  that  individual 
habits,  manners,  and  morals  are  fully  formed.  A  single 
activity  is  depressing  and  demoralizing.  The  injury  is 
counteracted  only  by  the  impulses  and  activities  brought 
out  by  early  education. 

Development  should  not,  however,  end  with  entrance 
into  business.  It  is  not  enough  that  men  become  effi- 
cient workers.  Every  man  should  have  an  opportunity 
to  bring  his  faculties  to  perfection.  The  stimulus  to 
higher  thoughts  and  activities  lies  mainly  in  the  larger 
world  which  men  enter  only  in  their  period  of  leisure. 
The  process  of  education  should  continue  as  long  as 
men  live.  They  should  never  lose  contact  with  the 
institutions  bringing  new  truth  within  the  reach  of  the 
masses.  Books,  lectures,  illustrations,  and  experimental 
methods  of  presenting  science  can  prevent  that  crust 
of  ignorance  and  habit  from  forming  which  renders 
men  static  and  reactionary.  Old  men  are  conservative 
because  they  have  lost  contact  with  the  progressive 
elements  in  civilization.  Had  their  education  continued, 
this  cramping  of  character  might  have  been  avoided. 
The  right  to  develop  means  the  right  of  contact  with 


Income  as  Modified  by  Economic  Rights        221 

all  the  elevating  forces  in  a  civilization  as  long  as  life 
lasts.  Whatever  narrows  the  environment  of  individ- 
uals or  limits  their  activities,  stops  their  growth  and 
checks  social  progress. 

An   opportunity  to  develop   depends   on   the   social  The  right  to 
surroundings  of  a  people  as  much  as  it  does  on  the  wholesome 

standards. 

educational  advantages.  If  a  man  must  work  and  keep 
his  family  in  contact  with  the  degrading  influences 
found  in  cities,  it  is  impossible  for  him  or  them  to 
maintain  their  moral  purity.  Wholesome  social  stand- 
ards are  a  part  of  the  conditions  demanded  for  the 
steady  improvement  of  each  person  and  family.  It  is 
not  enough  that  moral  principles  and  elevating  ideals 
be  taught  in  the  schools.  These  can  have  but  little 
permanent  influence  unless  embodied  in  practical  rules 
of  conduct  which  individuals  observe  throughout  life. 
School  knowledge  should  be  converted  into  social 
standards  to  which  all  must  conform.  Any  community 
will  be  contaminated  if  a  minority  is  allowed  to  violate 
social  conventions  and  to  introduce  degrading  practices. 
Men  tend  to  sink  to  the  level  of  their  community  or 
class.  A  progressive  nation  must  therefore  rigidly  pre- 
serve its  social  standards  and  supplement  them  by 
higher  and  more  complete  expressions  of  national  life. 

To  create  or  to  maintain  social  standards,  the  instincts,  The  right  to 
habits,  and  mode  of  living  of  all  the  people  must  be  so  hom°gene- 

ity  of  popu- 

similar  that  they  are  moved  by  common  impulses.  Even  iation. 
slight  differences  create  race  hatreds,  and  then  each 
class  is  willing  to  forego  or  destroy  a  general  advantage 
in  the  hope  of  injuring  its  enemies.  Tendencies  toward 
castes  or  sharply  defined  groups  weaken  the  force  of 
the  principles  and  motives  upon  which  common  action 


222  The  Theory  of  Prosperity 

depends.  If  the  differences  are  marked  enough  to  pre- 
vent intermarriage,  each  group  can  be  set  off  against 
others,  and  no  general  rights  or  ideals  are  evolved 
through  which  social  unity  is  secured.  Of  the  bad 
effects  of  this  state  of  affairs,  the  political  condition 
of  Austria  bears  witness.  The  differences  in  Ireland 
between  the  Orangemen  and  Catholics,  and  in  the 
Southern  States  of  the  Union  between  the  whites  and 
blacks  have  the  same  origin,  as  has  also  the  Anti- 
Semitic  agitation  in  various  countries.  The  lack  of 
homogeneity  in  these  and  other  cases  blocks  progress 
and  arouses  hatred,  where  otherwise  cordial  relations 
would  grow  up. 

It  does  not  follow  from  these  facts/  however,  that 
social  harmony  is  impossible  while  differences  in  race 
and  religion  exist.  If  these  races  are  in  different 
localities  or  in  different  industries,  no  opposition  of 
interests  need  appear.  Each  industry  or  locality  can 
then  develop  customs,  habits,  and  ideals  suited  to  its 
peculiar  needs,  which  would  not  conflict  with  those 
naturally  developing  in  other  places  and  industries. 
Economic  freedom  does  not  mean  the  dominance  of 
a  single  race  throughout  the  whole  world.  There  may 
be  as  many  types  of  men  as  there  are  different  groups 
of  industrial  conditions.  There  is  no  single  world  en- 
vironment, but  a  number  of  local  environments,  with 
features  so  distinct  that  different  types  of  men  have 
naturally  evolved.  Each  race  should  move  toward  that 
environment  where  its  industrial  efficiency  is  greatest, 
and  leave  other  races  in  possession  of  regions  where 
their  superiority  is  apparent.  To  move  negroes  north 
instead  of  south,  or  to  bring  the  people  of  Asia  to 


Income  as  Modified  by  Economic  Rights        223 

America,  violates  natural  tendencies,  and  brings  on 
social  conflicts.  Every  race  should  be  given  security 
and  prosperity  where  they  belong,  but  should  not  be 
allowed  to  disturb  the  orderly  development  of  regions 
for  which  they  are  not  fitted. 

It  is,  however,  homogeneity  of  population,  not  homo-  The  right  to 
geneity  of  opinion,   that  is  demanded.      Population  is  decislon  b/ 

public 

homogeneous  when  intermarriage  takes  place  and  com-  opinion, 
mon  instincts,  habits,  and  impulses  develop.  Opinions 
are  homogeneous  when  the  premises  of  reasoning  are 
the  same,  and  this  involves  firmer  social  bonds  and  iden- 
tical environing  conditions.  The  homogeneity  of  opin- 
ion is  demanded  only  in  the  case  of  public  decisions. 
The  minority  must  cheerfully  submit  to  the  majority, 
and  accept  for  the  time  a  public  decision  reached 
through  calm  discussion.  The  decisions  of  a  homo- 
geneous population  will  represent  the  general  wel- 
fare. The  great  issues  that  the  public  decide  are 
determined  in  the  long  run  by  the  effect  that  given 
measures  have  on  the  adjustment  of  the  nation  to  its 
environment.  Laws  will  soon  be  repealed  that  fail 
to  increase  the  general  welfare.  Democratic  tenden- 
cies are  advantageous  in  a  homogeneous  population, 
because  the  simple  test  of  increased  adjustment  to 
the  environment  can  always  be  applied,  and  the  re- 
sults made  apparent.  But  class  or  race  hatreds  dis- 
tract the  attention  and  bias  the  opinion  of  so  many 
that  the  application  of  the  proper  tests  is  impossible. 
Only  when  the  people  in  a  region  or  industry  are  con- 
scious of  their  similarity  and  kinship  can  a  moral  code 
develop  binding  them  together  in  peaceful  relations. 


224  The  Theory  of  Prosperity 


3.     RIGHTS    OF    LEISURE 

The  right  to  comfort.      The  right  to  leisure.      The  right  to   recreation. 
The  right  to  cleanliness.      The  right  to  scenery. 

The  right  to  In  modern  nations  the  productive  power  is  more  than 
comfort.  sufficient  to  produce  the  minimum  of  existence.  There 
is  a  social  surplus  above  the  costs  of  production  in 
which  every  worker  has  a  right  to  share.  All  men 
cannot  be  made  wealthy,  but  they  can  be  made  com- 
fortable by  some  of  the  social  surplus  going  to  each  of 
them.  The  right  to  comfort  is  a  right  to  share  in  the 
social  surplus ;  it  demands  that  the  workman  get  on 
each  increment  of  his  production  some  surplus  above  its 
cost.  To  be  free  is  to  be  comfortable,  to  have  a  home 
and  the  decencies  that  go  with  it.  Frugality,  con- 
tentment, and  domestic  bliss  are  impossible  unless  the 
surplus  of  the  isolated  worker  is  retained  by  the  work- 
man in  complex  industrial  conditions.  The  right  to 
comfort  is  not  a  right  to  equality  in  the  distribution  of 
wealth,  but  to  that  income  necessary  to  secure  to  the 
worker  the  best  physical  conditions.  Mere  living  means 
unwilling,  painful  labor,  for  no  one  works  efficiently 
without  surplus  energy. 

The  right  to  The  right  to  leisure  is  a  corollary  to  the  right  to 
comfort.  No  matter  what  income  a  person  receives, 
he  cannot  be  comfortable  without  some  time  for  enjoy- 
ment. Leisure  means  more  than  time  to  eat  and  sleep. 
The  full  revival  of  mental  and  physical  powers  demands 
a  period  of  rest  in  which  the  loss  of  surplus  energy  can 
be  restored.  A  normal  working  day  must  end  while 
work  is  still  pleasurable.  Any  drain  on  the  system 


Income  as  Modified  by  Economic  Rights       225 

reduces  the  vitality  of  the  worker,  and  causes  a  reduc- 
tion in  future  production  greater  than  the  present  gain 
from  overwork.  The  right  to  leisure  is  in  harmony 
with  the  greatest  efficiency,  and  cannot  be  lost  by 
workmen  without  detriment  to  other  classes  besides 
themselves. 

The  right  to  recreation  may  be  regarded  as  an  out-  The  right  to 
come  of  the  narrow  division  of  labor  demanded  by  pro-  recreatlon- 
duction  on  a  large  scale;  for  then  work  is  a  constant 
repetition  of  single  acts,  tiring  some  parts  of  the  body 
but  leaving  other  parts  without  sufficient  exercise.  The 
normal  man  must  have  all  the  parts  of  his  body  devel- 
oped and  all  his  mental  powers  kept  active.  Recreation 
is  the  only  process  by  which  this  is  accomplished. 
Each  one  must  have  outside  of  his  industrial  occupation 
enough  activity  to  revive  and  sustain  the  mental  and 
physical  powers  of  the  normal  man.  There  would  also 
be  a  racial  degeneration  if  each  class  neglected  the 
aptitudes  and  mental  qualities  not  demanded  in  its 
particular  occupation.  The  homogeneity  of  population 
would  then  be  destroyed,  and  with  it  would  disappear 
the  bonds  that  keep  society  peaceful  and  harmonious. 

Leisure  is  a  demand  for  time ;  recreation  is  a  demand 
for  active  occupation  outside  of  labor  hours,  and  in- 
volves conditions  that  can  be  secured  only  by  large 
social  expenditures.  Walking,  cycling,  travelling,  and 
other  forms  of  exercise  are  made  agreeable  only  by 
pleasant  surroundings ;  hence,  good  roads,  attractive 
streets,  fine  parks,  and  wholesome  places  of  resort  are 
necessary.  Mental  recreation  also  demands  churches, 
concerts,  lectures,  libraries,  public  discussions,  and  other 
means  of  exciting  spiritual  life.  Present  expenditures 
Q 


226  The  Theory  of  Prosperity 

for  these  purposes  indicate  that  this  right  is  partially 
recognized,  but  it  must  gain  more  complete  recognition 
before  industrial  efficiency  reaches  its  maximum. 
The  right  to  The  isolated  worker  in  a  primitive  society  had  all 
cleanliness.  tke  conditions  upon  which  health,  vigor,  and  physical 
well-being  depended.  The  control  of  a  quantity  of  land 
enabled  him  to  avoid  the  evil  consequences  naturally 
arising  from  the  pollution  caused  by  himself,  his  family, 
and  his  stock.  With  a  sparse  population  nature  easily 
restores  normal  conditions  by  transforming  refuse  matter 
into  useful  products ;  but  the  close  proximity  of  men 
in  advanced  societies  destroys  their  power  to  keep 
clean  and  their  surroundings  pure  without  similar 
cleanliness  and  purity  on  the  part  of  their  neigh- 
bors. The  filth  of  one  house  or  region  destroys 
the  exemption  from  disease  which  isolated  families 
enjoy.  A  whole  city  may  suffer  from  an  epidemic 
started  among  a  few  families  or  in  some  neglected 
street.  Where  no  disease  is  communicated,  the  refuse 
of  uncleanly  places  contaminates  the  air  and  depresses 
every  one.  Even  food  is  poisoned  by  the  presence  of 
noxious  compounds  and  by  microbes.  The  surplus 
energy  of  city  people  is  reduced  by  these  evils  and 
no  hope  of  improvement  exists  except  in  measures 
affecting  all  persons  and  places.  Clear  water,  pure  air, 
and  clean  streets  are  matters  of  public  interest,  and  for 
these  ends  the  social  surplus  should  be  freely  used. 
Public  control  should  be  extended  to  everything  that 
lowers  the  vitality  of  the  working  population. 

The  right  to  The  close  contact  of  men  in  modern  societies  also 
affects  men  unfavorably  through  their  loss  of  touch 
with  nature.  The  beautiful  in  nature  is  marred  or 


Income  as  Modified  by  Economic  Rights        227 

destroyed  by  the  processes  through  which  wealth  is 
created.  The  eye  needs  protection  as  well  as  other 
organs  of  the  body,  and  the  impressions  that  come 
through  it  are  as  important  as  those  made  by  any 
other  contact  with  the  external  world.  Men  should 
provide  for  their  visual  environment  with  the  same 
care  they  exert  in  providing  for  other  material  condi- 
tions. Not  only  must  natural  scenery  be  preserved 
and  restored,  but  the  demands  of  city  life  for  corres- 
ponding advantages  in  its  architecture,  museums,  and 
parks  must  be  met.  The  eye  should  never  be  need- 
lessly wearied  nor  its  sensitiveness  to  harmonious  rela- 
tions destroyed.  Bad  streets,  incongruous  buildings, 
and  glaring  advertisements  depress  men,  reduce  their 
productive  power,  and  check  the  growth  of  social 
feelings. 

4-     EXCEPTIONAL    RIGHTS 

The  right  to  relief.     The  right  of  women  to  income. 

Besides  the  general  rights  belonging  to  every  person  The  right  to 
in  the  industrial  world,  there  are  two  which  grow  out  relief- 
of  special  conditions.  Every  one  is  liable  to  misfor- 
tunes, and  the  hazards  of  business  are  such  that  fore- 
thought cannot  guard  against  them.  The  safest  of 
investments  become  worthless,  health  breaks  down, 
accidents  happen,  employment  is  uncertain,  and  sick- 
ness reduces  families  to  a  condition  where  aid  is  neces- 
sary. Against  these  and  similar  hardships  no  individual 
can  adequately  provide,  and  if  he  could,  it  would  be 
more  economical  to  have  them  guarded  against  by 
public  measures.  The  orderly  development  of  higher 


228  The  Theory  of  Prosperity 

wants,  tastes,  and  standards  is  delayed  or  prevented  by 
any  disturbing  fear  that  the  forethought  and  energy 
providing  for  them  will  not  attain  the  desired  end. 
Society  alone  can  remove  this  dread  by  giving  full 
protection  against  the  evils  of  the  industrial  world. 
The  energy  and  the  skill  of  each  person  should  be  left 
free  so  that  the  reward  for  work  can  come  to  the 
worker ;  but  misfortune  is  not  an  individual  affair  due 
to  conditions  that  individuals  make.  The  evil  may  lie 
in  the  environment,  as  in  the  case  of  a  failure  of  crops ; 
it  may  be  due  to  accidents  for  which  others  are  to 
blame  ;  to  the  diseases  and  degradation  of  bad  local  con- 
ditions ;  or  to  social  disorders  over  which  single  persons 
have  no  control.  In  such  cases  social  evils  should  be 
met  by  social  action.  Make  the  individual  responsible 
for  the  results  of  his  own  acts,  but  do  not  let  him  suffer 
from  what  he  could  not  avoid.  A  system  of  relief  is 
an  essential  to  industrial  freedom  ;  economic  activity 
will  not  reach  its  maximum  until  it  is  so  effective  that 
the  energy  of  individuals  can  be  applied  to  the  satis- 
faction of  their  own  wants.  The  social  surplus  is  more 
than  sufficient  to  provide  for  all  the  exigencies  that 
persons  cannot  control. 

The  right  of       There  is  another  special  right  growing  out  of  the  pecul- 
women  to       jar  position  of  women.     Certain  restrictions  to  woman's 

income. 

activities  have  become  general,  partly  the  result  of  her 
position  as  a  mother,  and  partly  as  an  outcome  of  social 
conventions  which  have  grown  up  in  advanced  nations.  It 
is  not  necessary  to  determine  whether  woman's  evils  are 
physical  or  social.  If  physical,  there  is  a  natural  ground 
for  giving  woman  a  preference ;  if  social,  this  pref- 
erence should  continue  until  society  is  reorganized  on 


Income  as  Modified  by  Economic  Rights        229 

some  other  plan.  While  husbands  and  fathers  demand 
that  wives  and  daughters  refrain  from  earning  an  income, 
public  opinion  and  law  should  support  the  claim  of 
women  to  an  adequate  support.  It  is  not  enough  that 
wives  have  the  right  of  support,  and  that  daughters  be 
provided  for,  so  long  as  their  father's  home  remains 
open.  The  disabilities  of  women  are  general  and 
affect  all  women.  The  provision  for  them  should  also 
be  general,  and  is  most  needed  by  those  having  neither 
friends  nor  homes.  In  some  occupations  women  have 
an  income  adequate  for  their  support.  This,  however, 
cannot  become  the  general  rule  so  long  as  the  present 
family  arrangements  and  social  conventions  continue. 
Grave  evils  must  continue  until  society  gives  to  women 
workers  an  income  large  enough  to  insure  their  physi- 
cal and  moral  well-being.  The  operation  of  economic 
forces  may  do  this  for  men,  but  it  must  fail  in  the  case 
of  women  so  long  as  they  suffer  from  physical  and  social 
disabilities.  The  social  surplus  should  therefore  be 
freely  used  for  women.  No  one  has  a  right  to  bring 
a  girl  into  the  world  without  providing  for  her  support, 
and  this  support  should  have  a  first  claim  on  every 
estate.  If  women  are  kept  from  industry  for  family 
reasons,  the  family  should  provide  an  income  for  them. 
Where  private  means  of  support  fail,  preference  should 
be  given  them  in  industries  for  which  they  are  es- 
pecially fitted.  No  society  is  safe,  nor  can  it  be  moral 
and  progressive,  until  women  are  fully  protected  and 
have  independent  incomes.  The  law  should  compel 
it,  if  higher  motives  do  not  move  men  to  compensate 
women  for  the  evils  to  which  they  are  liable,  and  from 
which  they  cannot  escape  without  losing  qualities  that 


230  The  Theory  of  Prosperity 

men  admire.  Women  will  be  crushed  or  idealized;  and 
if  idealized,  income  and  independence  are  essential. 
The  great  problem  for  men,  after  all,  is  the  problem 
of  women.  Men  do  the  work  and  bear  the  burdens  of 
to-day.  But  women  shape  the  men  of  to-morrow ;  the 
outgo  of  energy  toward  them  creates  a  store  upon  which 
the  future  can  draw. 

A  summary.  A  self-perpetuating  round  of  production  and  con- 
sumption is  the  goal  of  economic  activity,  and  repre- 
sents an  equilibrium  between  the  outgo  of  energy  and 
the  return  flow  of  goods. 

Goods 

/          % 

Utility  =  Energy 

If  the  goods  produced  do  not  give  enough  utility  to 
restore  the  lost  energy,  the  equilibrium  is  reestablished 
by  the  growth  of  desire,  and  when  once  formed,  subse- 
quent improvements  make  an  excess  of  energy  possible. 
The  accustomed  activity  now  produces  more  goods, 
from  which  come  more  utility  and  more  energy.  The 
excess  must  go  out,  but  need  not  bring  back  a  corre- 
sponding amount  of  utility  and  nutriment.  Impulse  is 
the  exit  of  this  energy  not  needed  to  keep  up  the  equi- 
librium between  waste  and  repair.  Katabolic  tenden- 
cies can  be  brought  to  an  equilibrium  only  in  situations 
demanding  more  energy,  but  this  new  equilibrium  will 
be  no  more  stable  than  its  predecessors.  The  impulses 
grow  stronger  and  changes  in  the  environment  become 
more  frequent  as  the  surplus  of  energy  increases.  In 
the  first  stages  of  progress,  the  excess  of  energy  is 
irregular  and  fitful,  only  manifesting  itself  when  the  food 
supply  is  abundant  or  when  some  unusual  event  arouses 


Income  as  Modified  by  Economic  Rights        231 

the  individual.  Love,  passion,  violence,  mob  rule,  and 
other  outbursts  of  feeling  represent  an  excess  which  is 
not  steady  and  enduring  enough  for  impulse  to  acquire 
a  definite  end.  These  fickle  impulses  are  displaced  by 
higher  forms  as  soon  as  the  excess  becomes  constant 
and  persistent.  An  enduring  excess  must  go  out  in  the 
direction  of  its  anabolic  complement.  If  it  is  merely 
an  erratic  discharge,  the  energy  is  lost  and  the  impulse 
lacks  the  surplus  vitality  needed  to  repeat  itself.  There 
is  thus  a  marked  difference  between  the  capricious  im- 
pulses that  go  out  in  any  direction  and  those  that  have 
fixed  avenues  of  exit ;  yet  they  all  have  a  common 
origin  in  the  excess  of  energy,  and  become  definite  as 
they  increase  in  intensity.  The  growth  of  desire  gives 
an  anabolic  complement  to  which  the  increasing  kata- 
bolic  excess  must  go  out.  Any  failure  of  the  two 
tendencies  to  supplement  each  other  would  ultimately 
destroy  the  individual  or  group  in  which  they  were 
present. 

Among  primitive  men,  as  in  the  animal  world,  the 
katabolic  excess  of  the  male  is  temporary,  and  comes 
during  the  season  when  the  food  supply  is  abundant. 
Sexual  impulse  is  thus  capricious  and  fitful,  with  no 
end  or  hold  on  future  action  ;  but  when  family  relations 
are  formed,  men  have  a  permanent  excess  of  energy 
which  goes  out  toward  their  wives  and  children.  Im- 
pulse now  becomes  as  fixed  as  are  the  conditions  cre- 
ating the  excess  of  energy.  The  psychic  feeling  must 
be  as  definite  as  is  the  direction  in  which  the  surplus 
energy  goes.  An  increase  of  the  katabolic  excess 
beyond  the  needs  of  the  family  becomes  possible  only 
when  new  impulses  of  equal  definiteness  and  constancy 


232  The  Theory  of  Prosperity 

have  been  aroused.  Religion,  giving  ends  and  ideals  of 
this  character,  develops  along  with  the  growth  of  surplus 
energy,  and  following  it  come  altruistic  impulses  that 
impel  more  activity  and  forethought  in  behalf  of  others. 
With  the  rise  of  cities  and  of  nations  a  new  excess  of 
energy  is  created  and  new  impulses  elevate  national  and 
local  ideals.  Each  rise  in  the  plane  of  civilization  thus 
creates  anabolic  concepts  and  ideals  that  demand  for 
their  realization  a  greater  katabolic  excess  in  men. 
Idealism  is  a  process  of  separating  anabolic  and  kata- 
bolic tendencies,  so  that  in  their  complementary  rela- 
tions more  energy  is  demanded  and  more  satisfaction 
obtained  than  if  each  individual  had  in  himself  the 
conditions  giving  an  equilibrium  between  activity  and 
consumption.  Economic  rights  represent  a  further 
growth  of  this  excess.  They  become  definite  and  con- 
stant as  society,  industry,  and  place  relations  (especially 
those  of  city  life)  become  more  clearly  anabolic,  and 
thus  furnish  ideals  toward  which  the  activity  of  men 
may  go  out.  To  the  degree  that  men  are  sustained  by 
their  environment,  social  and  physical,  they  can  be 
generous  in  action  and  disregard  the  return  flow  of 
goods  upon  which  the  attention  of  an  isolated  self- 
sustaining  man  must  always  be  centred.  Economic 
rights  therefore  are  not  the  product  of  normal  ten- 
dencies, but  of  an  excess  of  energy  demanding  no 
return  in  goods.  They  are  felt  by  those  who  have 
more  than  they  need  and  hence  want  nothing  personal. 
Those  who  have  less  than  the  normal  standard  gain  by 
rights,  but  they  do  not  establish  or  enforce  them.  A 
right  is  a  claim  some  one  else  will  enforce.  The  per- 
manent excess  in  energy  of  the  more  vigorous  is  trans- 


Income  as  Modified  by  Economic  Rights        233 

formed  into  an  impulse  to  elevate  others  to  their 
standards,  and  its  amount  measures  the  force  that  a 
nation  or  community  exerts  in  maintaining  the  rights 
of  the  less  fortunate. 

Social  standards  and  rights,  though  often  con- 
fused, have  in  reality  distinct  bases.  Standards  are 
built  up  and  maintained  by  the  class  that  profit  by 
them.  To  enforce  them  its  members  must  withdraw 
from  production,  restrict  their  number,  or  in  some  way 
exert  an  influence  on  distribution.  All  these  forces 
must  be  set  in  motion  by  themselves,  and  nothing  other- 
wise obtained  belongs  to  their  standard.  It  is  thus  a 
part  of  the  economic  equilibrium  that  normal  men  must 
secure.  Rights  give  income  beyond  this  amount.  The 
greater  equality  springs  from  the  excess  of  energy  that 
creates  social  bonds  by  evoking  ideals  and  impulses. 

New  rights  are  more  easily  acquired  in  industries  that 
regularly  share  in  the  social  surplus.  Here  employers 
are  interested  in  the  efficiency  of  their  laborers,  and  are 
willing  to  adopt  standards  that  could  not  be  obtained  in 
industries  to  which  nothing  goes  except  the  minimum 
return  for  labor.  Trusts,  large  corporations,  and  stable 
industries  find  it  advantageous  to  raise  wages  so  that  by 
a  selective  process  the  more  efficient  and  trustworthy 
remain  in  their  employment.  This  means  a  rate  of 
wages  somewhat  above  the  marginal  return,  and  the 
existence  of  a  class  of  laborers  exempted  from  the  fluc- 
tuations and  uncertainties  of  marginal  production.  In- 
dustries of  this  kind,  feeling  but  slightly  the  changes  in 
prices  that  cripple  and  often  crush  the  producers  at  the 
margin  of  production,  can  maintain  standards  that  the 
latter  would  find  impossible.  These  higher  standards 


234  The   Theory  of  Prosperity 

become  the  norms  by  which  the  public  measures  the 
just  rate  of  wages.  By  the  process  of  idealization  they 
are  made  universal,  and  imposed  on  all  industries.  A 
standard  once  seen,  and  shown  to  be  practicable,  be- 
comes a  social  ideal  creating  pressure  that  demands  its 
enforcement. 

A  final  re-  In  the  first  part  of  this  book  the  discussion  centred 
'nt'  on  the  problems  of  economic  equilibrium.  Where  each 
individual  is  independent  and  self-sustaining,  the  out- 
flow of  energy  and  the  return  flow  of  goods  are  equal. 
The  problem  of  work  and  pay  involves  only  those  rela- 
tions between  man  and  nature  which  give  the  normal 
man  a  perpetual  round  of  production  and  consump- 
tion. There  is  a  second  measure  of  normality  in  the 
equality  of  supply  and  demand  ;  for  the  amount  of  goods 
withdrawn  from  the  market  cannot  regularly  exceed  the 
supply  brought  to  it.  The  motives  for  production  in- 
crease as  wants  grow  in  intensity ;  but  costs  fall  off 
with  the  growth  of  productive  power,  thus  destroying 
the  equality  between  it  and  the  return  in  goods.  A 
new  equilibrium  is  created  on  the  market  by  the  equality 
of  marginal  expense  and  marginal  utility.  Wants  grow 
more  rapidly  than  productive  power;  values  rise,  and 
producers  gain  a  monopoly  power  equal  to  the  differ- 
ence between  cost  and  the  expense  of  goods.  Monopoly 
is  thus  essential  to  a  market  equilibrium,  and  the  mo- 
nopoly fund  has  its  size  fixed  by  the  natural  excess  of 
demand  over  supply.  Intense  wants  and  low  costs  of 
production  have  no  other  means  of  equating  themselves. 
A  third  test  of  normality  is  the  equilibrium  between 
the  destruction  and  replacement  of  capital.  Viewed  in 
this  way  capital  is  constant  in  amount,  but  changing 


Income  as  Modified  by  Economic  Rights        235 

in  form,  thus  making  it  too  broad  a  term  to  be  con- 
trasted with  land  and  labor.  The  equilibrium  is  between 
the  energy  of  the  past  spent  on  the  present,  and  that  of 
the  present  spent  on  the  future.  There  is  no  equality 
in  the  destruction  and  replacement  of  capital  goods. 
More  capital  goods  are  each  year  used  up  than  are 
replaced,  many  of  them  reappearing  only  as  improve- 
ments in  land  or  men.  But  the  whole  fund  is  self-per- 
petuating, and  gives  a  return,  much  of  which  is  included 
under  rent  and  wages. 

Normal  conditions  are  satisfied  when  the  economic 
equilibrium  is  maintained  and  each  worker  is  self-sus- 
taining. There  is,  however,  a  constant  tendency  to 
disturb  the  normal  equilibrium  by  the  creation  of 
an  excess  of  energy,  for  it  is  no  sooner  attained  than 
it  is  again  disturbed  by  the  appearance  of  a  new  excess. 
Wants  grow,  and  men,  producing  goods  at  decreasing 
cost,  work  longer  and  more  intensely.  An  enduring 
excess  is  only  possible  where  some  complementary 
relation  exists  by  which  the  excess  of  some  individuals 
or  classes  is  equalled  by  a  corresponding  deficit  of  other 
persons  or  classes.  There  is  in  a  society  an  outflow  of 
energy  that  does  not  return  in  the  form  of  goods  to 
those  who  put  it  forth.  One  part  gets  more  than 
it  gives,  and  another  part  gives  more  than  it  gets;  or 
it  may  be  that  individual  men  put  out  more  energy  and 
the  return  is  in  the  form  of  permanent  improvements, 
institutions,  and  social  betterments  that  all  enjoy.  The 
future  of  society  is  the  anabolic  complement  of  its  pres- 
ent katabolic  output.  Children  get  what  fathers  create. 
The  final  Utopia  is  the  recipient  of  all  the  surplus  of 
preceding  ages. 


236  The  Theory  of  Prosperity 

In  a  primitive  society  the  flow  of  goods  is  from  the 
weak  to  the  strong,  and  exploitation  is  its  measure. 
There  is  an  excess  of  natural  force  aiding  producers, 
and  it  is  turned  over  by  them  to  their  rulers,  leaders, 
and  conquerors.  In  advanced  societies,  through  the 
improvements  in  men,  there  is  an  excess  of  human 
energy;  the  flow  of  surplus  goods  changes  its  direc- 
tion, and  the  strong  give  of  their  surplus  to  the  weak ; 
men  become  katabolic,  and  to  remain  normal  must 
seek  some  anabolic  complement ;  personal  ideals  are 
increasingly  katabolic,  demanding  a  greater  output  of 
energy  and  placing  more  restrictions  on  consumption ; 
social  ideals  and  institutions  are  increasingly  anabolic, 
and  from  them  sources  of  pain  are  steadily  eliminated. 
The  environment  is  thus  transformed  so  that  all  its 
relations  give  pleasure  in  increasing  quantities. 

Reciprocal  relations  depend  on  this  excess  of  energy, 
and  society  is  more  firmly  welded  as  it  grows  in  amount. 
Each  class  or  group  goes  out  in  feeling  toward  those 
places  and  persons  that  complement  its  existence.  This 
impulse  is  a  pressure  to  make  other  things  and  per- 
sons better  than  they  are,  and  then  for  each  person 
or  class  to  differentiate  itself  more  fully  from  them,  so 
as  to  increase  and  intensify  the  complementary  relations. 
The  economic  equilibrium  working  through  desire  tends 
to  make  all  persons  equal,  independent,  and  self-sus- 
taining. The  excess  of  energy  as  impulse  differenti- 
ates, socializes,  and  idealizes,  and  hence  creates  bonds 
that  hold  the  partly-different  together.  The  social  ideal 
is  this  partly-different — the  better-than-self.  No  matter 
how  well  regulated  is  the  life  of  the  individual,  the 
better-than-self  is  still  above  him,  and  the  struggle  for 


Income  as  Modified  by  Economic  Rights       237 

the  new  level  creates  an  additional  adjustment  and  more 
self-control.  The  social  ideal  is  thus  a  perpetual  up- 
building force,  constantly  eliminating  imperfections,  but 
as  constantly  causing  the  perception  of  others  through 
the  higher  normal  life  which  their  elimination  makes 
possible.  The  better-than-self  evokes  the  activity  needed 
for  its  attainment,  but  this  activity  elevates  the  ideal 
more  rapidly  than  it  does  the  man  who  strives  after  it. 
Each  new  equilibrium  creates  an  excess  of  energy,  and 
each  excess  forces  a  new  equilibrium.  The  economic 
and  social  thus  react  on  each  other  and  impel  men 
toward  a  goal  that  is  moved  farther  away  by  every 
effort  to  reach  it.  Perfection  is  never  possible  while 
man  and  his  environment  react  favorably  on  each  other. 
The  ideal  is  not,  however,  a  distant  end  to  be  reached 
only  after  an  endless  succession  of  endeavors.  A  part 
of  adjustment  is  as  ideal  as  it  ever  can  be.  There  is  a 
progress  toward  an  equilibrium  which  depends  on  desire 
and  a  progress  in  the  expansion  of  wants  and  activities 
that  is  attained  through  impulse.  The  one  creates  the 
normal,  the  other  the  ideal.  These  two  forms  of  prog- 
ress exist  side  by  side,  but  in  different  fields.  Men 
gain  some  ends  in  one  way,  some  in  the  other.  A  civili- 
zation is  forceful  as  the  desire  for  the  normal  and  the 
impulse  toward  the  ideal  find  distinct  but  concurrent 
means  of  expression.  They  are  both  present  realities 
and  demand  constant  unswerving  recognition. 


The  Development  of 

English  Thought 

A   STUDY   IN  THE   ECONOMIC   INTERPRETATION 
OF   HISTORY 

By  SIMON  N.  PATTEN 

Professor  of  Political  Economy  at  the  University  of  Pennsylvania 

Cloth  Extra.     Crown  8vo.     $3.00 

CONTENTS: 

CHAPTER  I.  —  THE  THEORY 

National  Character  —  Kinds  of  Environments  —  Adjustment  to  the  Environment  — 
Race  Ideals  —  The  Stratification  of  Society  —  The  Clingers  —  The  Sensualists  — 
The  Stalwarts  —  The  Mugwumps  —  The  Development  of  Classes  —  Stages  in  the 
Progress  of  Thought  —  Curves  of  Thought. 

CHAPTER  II.  — THE  ANTECEDENTS  OF  ENGLISH  THOUGHT 

Primal  Economic  Conditions  —  The  Early  Germans  —  The  Catholic  Supremacy  — 
The  Economic  Influence  of  the  Early  Church  —  The  Fifteenth  Century  —  Political 
Conditions  —  The  Church  Programme  —  Crime  and  Vice  —  Indulgences  — Social 
Problems  —  The  New  Wave  of  Sensualism. 

CHAPTER  III.  — THE  CALVINISTS 

Calvinism — Frugalism  —Word  Visualism  —  Puiitan  Opposition  to  Vice  —  Merry 
England — Primitive  Traits  —  Public  Amusements  —  The  Disappearance  of  the 
Puritans  —  On  the  Interpretation  of  Great  Writers  —  Thomas  Hobbes  —  John 
Locke  —  Results  of  Locke's  Analysis — The  Deists  —  The  Outcome. 

CHAPTER  IV. —  THE  MORALISTS 

Picture  of  the  Eighteenth  Century- — Bernard  Mandeville  —  David  Hume  —  Adam 
Smith  —  The  Religious  Revival  —  Whitefield  and  Wesley  —  The  Manly  and 
Womanly  Elements  in  Religion  —  Methodism  —  The  Joint  Influence  of  Adam 
Smith  and  Wesley. 

CHAPTER  V.  — THE  ECONOMISTS 

The  Decline  of  France — The  Utopists  —  Thomas  Malthus  —  David  Ricardo  —  The 
Economic  Philosophy — John  Stuart  Mill  —  Charles  Darwin  —  The  English  Poets 
—  The  Oxford  Movement  —  The  Xew  Religious  Ideals. 

CHAPTER  VI.  —  CONCLUDING  REMARKS 

The  Harmony  of  Religious  and  Economic  Concepts  —  The  Influence  of  Science  — 
Socialism  —  Fields  for  Future  Adjustment  —  The  Xew  Environment  —  The  Triumph 
of  Stalwartism  —  The  New  Thought  Curves  —  The  Socializing  of  Natural  Religion. 


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The  Development  of  English  Thought 

A  STUDY  IN   ECONOMIC   INTERPRETATION  OF  HISTORY 

By  SIMON  N.  PATTEN 

Professor  of  Political  Economy,  University  of  Pennsylvania 


A    BRIEF   STATEMENT   OF   SOME   IMPORTANT   TOPICS   TREATED 
IN   THE    VOLUME 

National  Character.  —  It  is  not  what  a  man  sees  or  hears  that  determines  his  character, 
but  the  activities  or  motor  reactions  which  these  perceptions  excite.  These  motor 
reactions  are  slowly  acquired  but  persist  indefinitely  because  they  reappear  in  each 
succeeding  generation.  An  environment,  on  the  other  hand,  consists  of  certain 
definite  objects  and  forces  constituting  at  a  given  time  the  requisites  for  survival, 
and  lasts  only  so  long  as  a  given  group  of  these  requisites  has  a  supreme  economic 
value.  When  a  group  of  requisites  is  displaced  by  another,  men  are  compelled  to 
develop  new  activities  in  harmony  with  the  new  conditions.  There  has  been,  there- 
fore, not  one  perpetual  environment,  but  a  series  of  temporary  environments,  each 
of  which  has  given  to  the  race,  through  the  economic  struggle  it  has  excited,  certain 
characteristics  that  have  become  a  part  of  the  national  character.  And  thus  char- 
acter is  the  one  enduring,  growing  element  in  a  civilization ;  when  compared  with 
it,  all  else,  whether  economic  or  physical,  is  temporary  and  fleeting.  This  view  of 
the  importance  of  character  is  not  opposed  to  an  economic  interpretation  of  history, 
but  is  a  plain  deduction  from  it.  That  which  endures  has  more  importance  than 
that  which  is  frequently  displaced. 

Types  of  Men. — Although  the  English  race  has  many  characteristics  in  common, 
there  are  several  types  of  men  so  distinct  in  their  feelings  and  premises  that  they  do 
not  respond  to  the  same  sentiments  and  arguments.  No  one  type  has  been  power- 
ful enough  to  subordinate  the  others,  and  hence  progress  has  been  due  more  to 
compromise  than  to  sentiments  universally  accepted,  or  to  doctrines  and  creeds 
based  on  principle. 

The  Influence  of  Women.  —  There  is,  however,  but  one  type  of  women.  Mothers  have 
the  same  interests,  sentiments,  and  fears,  and  strive  in  the  same  way  to  guard  the 
welfare  of  their  homes.  Women  have  seldom  taken  part  in  public  discussions  or 
written  books  of  importance,  but  they  have  influenced  the  customs,  institutions,  and 
ideals  of  the  race  more  than  men  because  they  have  all  striven  for  the  same  objects 
and  have  persisted  until  social  life  has  been  modified  in  the  way  they  desire.  The 
compromises  of  men  have  secured  peace,  but  it  is  the  activity  of  women  that  has 
caused  the  social  progress  of  the  last  three  centuries. 

Stalwarts  and  Mugwumps.  —  In  the  English  race  the  most  prominent  psychic  dis- 
tinction relates  to  the  sensory  and  motor  development  of  men.  The  stalwarts  love 
activity  and  are  impressed  by  clear  ideals  and  bold  principles.  They  are  often 
carried  away  by  high-sounding  phrases  and  are  easily  induced  to  enter  upon  rash 
schemes  in  the  hope  of  realizing  their  ideals.  The  mugwumps  do  not  come  into 
close  enough  contact  with  objective  conditions  to  compel  the  subordination  of 
reason  and  analysis  to  motor  adjustment.  They  are  vigorous  in  thought  but  seldom 
carry  out  a  policy  with  energy  enough  to  ensure  success.  As  a  rule  the  mugwumps 
are  aesthetic  and  moral,  while  the  stalwarts  are  religious  and  economic.  The  politi- 
cal and  social  struggles  of  the  present  time  are  due  to  these  opposing  views,  and  the 
direction  of  future  progress  depends  upon  which  of  them  becomes  dominant. 


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DATE  DUE 


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